Asset and Wealth Management Research Digest PwC | AWM Asia Pacific Market Research Centre Issue 3 | 2019
Asset managers eager to tap on Asia Pacific growth
The asset management industry in Asia Pacific On the other hand, distribution in most parts of (“APAC”) is a bright spot that’s hard to ignore. Fuelled Southeast Asia is a multi-layered process which by rising affluence and financial deepening in emerging requires asset managers without a local presence to Asian economies, we expect assets in the region to first secure local asset management partners before reach USD 16.9 trillion by 2020 and rise further to hit locating distribution partners. USD 29.6 trillion by 2025.1 When entering APAC markets, there are two key issues As a result of growing opportunities, many foreign that foreign asset managers have to contend with: asset managers have flocked to the region. While these entrants were often synonymous with US or European managers, the profile of newcomers today are much Do I manufacture local funds or more varied. In fact, we are seeing an influx of Asian 01 import offshore products? asset managers, particularly from Japan, cast their eyes on expanding regional opportunities.
For those who are setting foot in APAC for the first time, 02 How do I enter the market? navigating the distribution landscape is often cited as a major challenge. Markets like Singapore and Hong Kong have lower barriers of entry compared to others, but gaining access is merely one of the first few steps to building a successful retail business.
1PwC, Asset & Wealth Management 2025: The Asian Awakening, 2019 2Asset Asset and and Wealth Wealth Management Management Research Research Digest Digest 2 Local or offshore?
In APAC, a select group of markets offer asset managers the choice of importing their UCITS range, Figure 1: Domiciles of retail mutual funds, 2018 while most markets require foreign players to launch a local suite for investors. Across markets which permit the sale of onshore and offshore products, Singapore, Both onshore and offshore funds Hong Kong and Taiwan are among the most conducive for asset managers.
On the other hand, offshore UCITS are allowed in Japan and South Korea, but occupy a smaller proportion of assets compared to local funds. Singapore Taiwan
Japan Hong Kong Japan
While Japanese authorities permit managers to Predominantly onshore funds offer offshore products, onshore products sold by homegrown houses continue to dominate the local market, both in number and assets under management (“AuM”). Onshore retail funds, excluding fund of funds (“FoFs”) and exchange-traded funds (“ETFs”), occupied assets of USD 557.8 billion, more than ten times of Australia Malaysia offshore funds, which had USD 52.5 billion in assets as of end 2018.
South Korea China Indonesia South Korea, which allows asset managers to import offshore funds, has seen little interest in offshore products since the introduction of capital gains tax exemptions for locally domiciled funds investing Philippines Vietnam overseas between 2007 and 2009. Though the playing field has been levelled between onshore and offshore products investing overseas, interest in offshore products has almost vapourised. South Korea India
Thailand
Source: PwC Market Research Centre Analysis
Asset and Wealth Management Research Digest 3 Figure 2: Number of onshore and offshore retail mutual funds, 2013-2018
2013 2014 2015 2016 2017 2018
Singapore
Onshore 249 250 253 253 248 246
Offshore 801 856 880 926 938 961
Hong Kong
Onshore 459 573 636 707 755 762
Offshore 1449 1436 1474 1489 1450 1423
Taiwan
Onshore 551 554 568 597 622 644
Offshore 1016 1025 1024 1041 1045 1035
Japan
Onshore 3278 3505 3703 3835 3866 3850
Offshore 965 918 974 984 943 934
Sources: SFC, SITCA, Toushin, Morningstar, PwC Market Research Centre Analysis
Move towards onshore products In both countries, funds domiciled in Luxembourg, Ireland and Cayman are commonplace, but the In Singapore, Hong Kong and Taiwan, the number introduction of local corporate structures offering similar of offshore products clearly exceeds that of onshore incentives are now increasingly considered by managers. funds, as depicted in Figure 2. In these jurisdictions, regulators have introduced measures to either In Hong Kong, the open-ended fund companies (“OFC”) address the imbalance in the offshore fund market, regime kicked off in July 2018 and the Variable Capital or to encourage asset managers to deepen their local Company (“VCC”) regime is expected to be effective in presence by using local fund structures. Singapore late this year. If successful, these corporate structures will invariably benefit stakeholders in the fund Case in point: to advocate growth in the local fund ecosystem, including custodians, administrators market, the Taiwanese regulator, in addition to and lawyers. introducing preferential measures for qualified foreign managers, has also imposed investment limits on offshore funds.
New corporate structures to facilitate development of fund ecosystem
Meanwhile, the Hong Kong and Singapore regulators have also declared their intentions to draw asset managers onshore with the introduction of new corporate vehicles.
4 Asset and Wealth Management Research Digest Figure 3: Proportion of onshore fund products (by number) in select APAC countries, 2013-2018
40% 38% 35% 35% 36% 36% 37% 35% 30% 32% 34% 30% 29% 24% 23% 20% 22% 21% 21% 20%
10%
0%
2013 2014 2015 2016 2017 2018
Taiwan Hong Kong Singapore
Sources: SITCA, SFC, Morningstar, Toushin, PwC Market Research Centre Analysis
Onshore products on the rise in Taiwan and Align fund vehicles with local ambitions Hong Kong As regulators trend towards deepening local markets As seen in Figure 3, the proportion of onshore funds even in open economies, it is important for both new has been on a steady increase, particularly in Hong and existing retail players to closely monitor regulatory Kong. In Hong Kong, registering a fund onshore also changes and adapt accordingly to harness the long- allows asset managers, subject to conditions, partake term benefits of chosen fund domiciles. in the Mutual Recognition of Funds between Hong Kong and China. In APAC, some of the most successful foreign asset managers, particularly in Hong Kong and Taiwan, have In Singapore, the number of onshore retail products has adapted from a wholly offshore suite to a combination stayed relatively flat, but fallen in proportion due to a of onshore and offshore products. The move towards sharp rise in offshore fund launches. launching new onshore fund products has given these asset managers greater investment flexibility and wider market access to schemes such as members’ choice pensions and cross-border fund initiatives.
Onshore vehicles can provide ease of access to regional schemes
The Asia Region Funds Passport (“ARFP”) is now live. Subject to local approval, asset managers can now register their funds in Australia, Japan or Thailand as home jurisdictions. Requirements for ARFP application in the two other participating jurisdictions, New Zealand and South Korea, have yet to be announced. Based on our understanding, fund approval processes in APAC generally favour onshore, plain-vanilla products. Offshore products, on the other hand, may require more than the average approval time of 2-3 months.
Asset and Wealth Management Research Digest 5 APAC market entry
It’s no secret that the APAC asset management market – ahead of Europe and North America – is one of the fastest growing regions globally. By 2025, we expect client assets in the region to breach the USD 90 trillion mark, with mass affluent and high net worth investors’ assets making up close to three-quarters of regional AuM.2
Figure 4: Total client assets, 2007-2025E (USD Tn)
Clients 2007 2017 2020E 2025E
Pension 2.1 4.6 5.8 6.8
Insurance 4.8 10.5 11.7 13.7
SWF 1.5 3.1 4.0 5.7
High net worth individuals 9.9 17.0 19.9 28.9
Mass affluent 14.2 22.3 25.9 36.6
Total client assets 32.5 57.5 67.3 91.7
Source: PwC Market Research Centre Analysis
2PwC, Asset & Wealth Management 2025: The Asian Awakening, 2019
6 Asset and Wealth Management Research Digest Tapping on these assets however, requires a good grasp of market entry strategies in the respective countries. Figure 5 illustrates common ways for asset managers to access APAC markets:
Figure 5: Popular market entry strategies in APAC markets
Setting up local operations Sub-advisory Master-feeder/fund of funds
Singapore
Hong Kong
Taiwan
China
South Korea
Japan
Indonesia
Thailand
Malaysia
Philippines
Australia
Vietnam
India
Source: PwC Market Research Centre Analysis
Asset and Wealth Management Research Digest 7 (1) Setting up local operations particularly those with niche offshore international investment capabilities, can help local players to Upon receiving local approval, asset managers can set expand their investment remit. Foreign asset managers, up a local operation, either independently or as a joint on the other hand, also benefit from the ability to garner venture. Managers who do not wish to fully commit may assets without having to invest substantially also set up a representative office before investing more on marketing. heavily in the jurisdiction. The table below showcases the top ten foreign (2) Sub-advisory asset managers by sub-advised assets in Japan. In markets where strong local branding has been a As of mid-2018, these managers, led by a US fixed winning formula, many foreign entrants have opted to income specialist, played advisor to USD 90.4 billion collaborate with local players through sub-advisory of investments. We believe the sub-advisory route partnerships. will remain persistent in Japan, but will require more differentiation from global players as competition in Sub-advisory partnerships have been popular in the segment heats up. South Korea and Japan as foreign asset managers,
Figure 6: Top 10 global asset managers by sub-advised assets in Japan, June 2018 (USD Bn)
Rank Asset manager No. of sub-advisory relationships Jun-18 with local asset managers
1 US-headquartered asset manager 10 19.8
2 US-headquartered asset manager 12 12.0
3 US-headquartered asset manager 4 11.2
4 US-headquartered asset manager 4 10.0
5 US-headquartered asset manager 1 9.6
6 US-headquartered asset manager 4 7.5
7 US-headquartered asset manager 2 5.5
8 Germany-headquartered asset manager 8 5.1
9 US-headquartered asset manager 2 4.9
10 US-headquartered asset manager 9 4.8
Sources: Morningstar, PwC Market Research Centre Analysis
Did you know?
The first mutual fund investing in self-driving technology was introduced in Korea in 2017. The fund was launched by a local asset manager that leveraged on the investment capabilities of a US asset manager with an autonomous car portfolio.
8 Asset and Wealth Management Research Digest (3) Master-feeder/fund of funds When selecting partners, local asset managers with strong distribution affiliation tend to be preferred. In In most parts of Southeast Asia and Australia, master- fact, in Thailand where master-feeder fund structures feeder/fund of funds partnerships are aplenty. In have garnered the most assets in Southeast Asia, Australia where multi-manager funds are commonly investments gathered by feeder funds from the three offered on retirement platforms, a good number largest asset managers accounted for over half of total of foreign asset managers have collaborated with feeder fund assets, as shown in Figure 7. All three of Australian managers with the aim of being onboarded these asset managers have major banking affiliates. as a partner.
In Thailand, Malaysia and the Philippines, most foreign asset managers penetrate the retail market by partnering with local asset managers.
Figure 7: Foreign investment feeder fund assets held by top asset managers in Thailand (%), 2018
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Top 3 players Top 5 players Top 10 players Others
Sources: Morningstar, PwC Market Research Centre Analysis
Asset and Wealth Management Research Digest 9 Figure 8: Market entry considerations
Market entry strategies Amount of Investment Distribution Most suitable for required by firm High potential
Direct Setting High High Markets of high importance up local and where funds are operation distributed on open- architecture platforms
Indirect Sub-advisory Low to moderate Low Markets with high barriers of entry (regulations, Master-feeder/ Low to moderate Low to moderate distribution, branding etc.), fund of funds but limited international investment expertise
Source: PwC Market Research Centre Analysis
Different strokes for different folks While we have highlighted popular entry strategies in this research piece, it is important to note that these In high priority markets, it is generally recommended strategies will not be equally relevant for incoming that asset managers invest for the long run, but remain managers. Besides emulating popular modes of prepared for short term re-adjustments. entry, asset managers also need to look within – Meanwhile, indirect entry strategies are suited for asset by considering their respective market goals and managers who wish to test local waters before making investment capabilities – to find their own paths more significant investments. to success.
10 Asset and Wealth Management Research Digest Asian Investment Fund Centre
Market Intelligence Operational Due Diligence (ODD) & Country Digest Operational Due Diligence Readiness
Our structured, research-based analysis sheds light Poor operational infrastructure can be a drag on on the multiple factors affecting your asset performance and service level. Since interdependencies management business. exist between operational risk and other risk categories, operational failures tend to result in large losses. This is Each market intelligence country digest provides especially important since we are in an environment with you with: increased regulatory requirements for operational risk. Our • The state of the asset & wealth management industry Investment Fund Centre has experience in performing ODD • The key trends shaping the future of the industry assessments for investors and has helped prepare asset managers for ODD requests in the APAC region. • Products that are in demand • Your competitors • Various types of investors and their asset allocations Australia Malaysia Japan Thailand • Fund selectors and the asset classes that interest them • The distribution channels and how they are evolving
• High level regulatory information to get you started Philippines New Zealand China • Prevailing market strategies
Market Distribution India Hong Kong Singapore Mapping Models
Regulatory Budgeting Rules Taiwan South Korea Indonesia
Benchmarking Distribution Strategy
Benchmarking studies in the fund industry act as A robust and well-designed distribution strategy should an important tool for establishing, evaluating, and identify the specific requirements and best practices of justifying inter-company transactions. In achieving these each local target market for the funds you wish to institute. objectives, the Market Research team provides support Our analysis of local markets and key distribution channels in developing such benchmarking studies – as part of (whether direct or via partnerships), along with current best the tax documentation and fund structuring process, practices, will help you develop a distribution strategy that or to help build revenue models – while also performing will maximise your opportunities for success. sensitivity analysis to help assess the impact of your Asset and Wealth Management Research Digest funds’ fee structure on your profitability. In ensuring the Monthly bulletin reliability and accuracy of our studies, we work with data from specialized databases provided by credited PwC’s monthly Market Research Digest and established vendors within the industry. aims to keep you up to date with not only the ongoings and happenings in the Asset and Wealth Management space in Asia Pacific, but also provide interesting and thought provoking views and analysis of trends in the industry. Fund Customised House What fund Flows benchmarking Views buyers are Subscribe to get monthly comparison looking at updates through this QR code https://bit.ly/2s4hijH
Asset and Wealth Management Research Digest 11 Contacts
Armin Choksey Partner, Asian Investment Fund Centre & Market Research Centre Leader PwC Singapore +65 6236 4648 [email protected]
Ivy Pan Manager, Market Research Centre PwC Singapore +65 8809 4597 [email protected]
Look out for our next issue of AWM Market Research digest to be released end-April 2019. Subscribe to our future research digests at our website here https://bit.ly/2s4hijH
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