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1PwC, Asset & Wealth Management 2025: The Asian Awakening, 2019

PwC | AWM Asia Pacific Market Research CentreIssue 3 | 2019

Asset and WealthManagement Research Digest

The asset management industry in Asia Pacific (“APAC”) is a bright spot that’s hard to ignore. Fuelled by rising affluence and financial deepening in emerging Asian economies, we expect assets in the region to reach USD 16.9 trillion by 2020 and rise further to hit USD 29.6 trillion by 2025.1

As a result of growing opportunities, many foreign 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 more varied. In fact, we are seeing an influx of Asian asset managers, particularly from Japan, cast their eyes on expanding regional opportunities.

For those who are setting foot in APAC for the first time, 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.

Asset managers eager to tap on Asia Pacific growth

01

02

On the other hand, distribution in most parts of Southeast Asia is a multi-layered process which requires asset managers without a local presence to first secure local asset management partners before locating distribution partners.

When entering APAC markets, there are two key issues that foreign asset managers have to contend with:

How do I enter the market?

Do I manufacture local funds or import offshore products?

2 Asset and Wealth Management Research DigestAsset and Wealth Management Research Digest 2

Asset and Wealth Management Research Digest 3

In APAC, a select group of markets offer asset managers the choice of importing their UCITS range, 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, 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.

Japan

While Japanese authorities permit managers to 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 offshore funds, which had USD 52.5 billion in assets as of end 2018.

South Korea

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 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.

Figure 1: Domiciles of retail mutual funds, 2018

Both onshore and offshore funds

Predominantly onshore funds

Source: PwC Market Research Centre Analysis

Local or offshore?

Hong Kong

Australia Malaysia

Philippines Vietnam

China Indonesia

South Korea India

Thailand

Taiwan

Japan

Singapore

4 Asset and Wealth Management Research Digest

Singapore

Onshore

Offshore

Hong Kong

Onshore

Offshore

Taiwan

Onshore

Offshore

Japan

Onshore

Offshore

249

801

459

1449

551

1016

3278

965

250

856

573

1436

554

1025

3505

918

253

880

636

1474

568

1024

3703

974

253

926

707

1489

597

1041

3835

984

248

938

755

1450

622

1045

3866

943

246

961

762

1423

644

1035

3850

934

Figure 2: Number of onshore and offshore retail mutual funds, 2013-2018

2013 2014 2015 2016 2017 2018

Sources: SFC, SITCA, Toushin, Morningstar, PwC Market Research Centre Analysis

Move towards onshore products

In Singapore, Hong Kong and Taiwan, the number of offshore products clearly exceeds that of onshore funds, as depicted in Figure 2. In these jurisdictions, regulators have introduced measures to either address the imbalance in the offshore fund market, or to encourage asset managers to deepen their local presence by using local fund structures.

Case in point: to advocate growth in the local fund market, the Taiwanese regulator, in addition to 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.

In both countries, funds domiciled in Luxembourg, Ireland and Cayman are commonplace, but the introduction of local corporate structures offering similar incentives are now increasingly considered by managers.

In Hong Kong, the open-ended fund companies (“OFC”) regime kicked off in July 2018 and the Variable Capital Company (“VCC”) regime is expected to be effective in Singapore late this year. If successful, these corporate structures will invariably benefit stakeholders in the fund ecosystem, including custodians, administrators and lawyers.


Figure 3: Proportion of onshore fund products (by number) in select APAC countries, 2013-2018

Sources: SITCA, SFC, Morningstar, Toushin, PwC Market Research Centre Analysis

40%

30%

20%

10%

0%

24%

2013 2014 2015 2016 2017 2018

Onshore products on the rise in Taiwan and Hong Kong

As seen in Figure 3, the proportion of onshore funds has been on a steady increase, particularly in Hong Kong. In Hong Kong, registering a fund onshore also allows asset managers, subject to conditions, partake in the Mutual Recognition of Funds between Hong Kong and China.

In Singapore, the number of onshore retail products has stayed relatively flat, but fallen in proportion due to a sharp rise in offshore fund launches.

35% 35%35%

29%

36% 36%

30% 32%

37%

34%

38%

Taiwan Hong Kong Singapore

Align fund vehicles with local ambitions

As regulators trend towards deepening local markets even in open economies, it is important for both new and existing retail players to closely monitor regulatory changes and adapt accordingly to harness the long-term benefits of chosen fund domiciles.

In APAC, some of the most successful foreign asset managers, particularly in Hong Kong and Taiwan, have adapted from a wholly offshore suite to a combination of onshore and offshore products. The move towards 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.

23% 22% 21% 21%20%


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

APAC market entry

Figure 4: Total client assets, 2007-2025E (USD Tn)


Pension

Insurance

SWF

High net worth individuals

Mass affluent

Total client assets

Clients

2.1

4.8

1.5

9.9

14.2

32.5

4.6

10.5

3.1

17.0

22.3

57.5

5.8

11.7

4.0

19.9

25.9

67.3

6.8

13.7

5.7

28.9

36.6

91.7

2007 2017 2020E 2025E

2PwC, Asset & Wealth Management 2025: The Asian Awakening, 2019


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


Singapore

Hong Kong

Taiwan

China

South Korea

Japan

Indonesia

Thailand

Malaysia

Philippines

Australia

Vietnam

India

Setting up local operations Sub-advisory Master-feeder/fund of funds


Figure 6: Top 10 global asset managers by sub-advised assets in Japan, June 2018 (USD Bn)

Sources: Morningstar, PwC Market Research Centre Analysis

1

2

3

4

5

6

7

8

9

10

Rank

US-headquartered asset manager







Germany-headquartered asset manager



10

12

4

4

1

4

2

8

2

9

19.8

12.0

11.2

10.0

9.6

7.5

5.5

5.1

4.9

4.8

Asset manager No. of sub-advisory relationships with local asset managers

Jun-18

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.

(1) Setting up local operations

Upon receiving local approval, asset managers can set up a local operation, either independently or as a joint venture. Managers who do not wish to fully commit may also set up a representative office before investing more heavily in the jurisdiction.

(2) Sub-advisory

In markets where strong local branding has been a winning formula, many foreign entrants have opted to collaborate with local players through sub-advisory partnerships.

Sub-advisory partnerships have been popular in South Korea and Japan as foreign asset managers,

particularly those with niche offshore international investment capabilities, can help local players to expand their investment remit. Foreign asset managers, on the other hand, also benefit from the ability to garner assets without having to invest substantially on marketing.

The table below showcases the top ten foreign asset managers by sub-advised assets in Japan. As of mid-2018, these managers, led by a US fixed income specialist, played advisor to USD 90.4 billion of investments. We believe the sub-advisory route will remain persistent in Japan, but will require more differentiation from global players as competition in the segment heats up.


Figure 7: Foreign investment feeder fund assets held by top asset managers in Thailand (%), 2018

Sources: Morningstar, PwC Market Research Centre Analysis

(3) Master-feeder/fund of funds

In most parts of Southeast Asia and Australia, master-feeder/fund of funds partnerships are aplenty. In Australia where multi-manager funds are commonly offered on retirement platforms, a good number of foreign asset managers have collaborated with Australian managers with the aim of being onboarded as a partner.

In Thailand, Malaysia and the Philippines, most foreign asset managers penetrate the retail market by partnering with local asset managers.

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Top 3 players Top 5 players Top 10 players Others

When selecting partners, local asset managers with strong distribution affiliation tend to be preferred. In fact, in Thailand where master-feeder fund structures have garnered the most assets in Southeast Asia, investments gathered by feeder funds from the three largest asset managers accounted for over half of total feeder fund assets, as shown in Figure 7. All three of these asset managers have major banking affiliates.


Figure 8: Market entry considerations


Direct

Indirect

Setting up local operation

Sub-advisory

Master-feeder/fund of funds

Market entry strategies

High

Low to moderate

Low to moderate

High

Low

Low to moderate

Markets of high importance and where funds are distributed on open-architecture platforms

Markets with high barriers of entry (regulations, distribution, branding etc.), but limited international investment expertise

Amount of Investment required by firm High

Distribution potential

Most suitable for

Different strokes for different folks

In high priority markets, it is generally recommended that asset managers invest for the long run, but remain prepared for short term re-adjustments.

Meanwhile, indirect entry strategies are suited for asset managers who wish to test local waters before making more significant investments.

While we have highlighted popular entry strategies in this research piece, it is important to note that these strategies will not be equally relevant for incoming managers. Besides emulating popular modes of entry, asset managers also need to look within – by considering their respective market goals and investment capabilities – to find their own paths to success.


Our structured, research-based analysis sheds light on the multiple factors affecting your asset management business.

Each market intelligence country digest provides you with:

• The state of the asset & wealth management industry

• The key trends shaping the future of the industry

• Products that are in demand

• Your competitors

• Various types of investors and their asset allocations

• 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

• Prevailing market strategies

Benchmarking studies in the fund industry act as an important tool for establishing, evaluating, and justifying inter-company transactions. In achieving these objectives, the Market Research team provides support in developing such benchmarking studies – as part of the tax documentation and fund structuring process, or to help build revenue models – while also performing sensitivity analysis to help assess the impact of your funds’ fee structure on your profitability. In ensuring the reliability and accuracy of our studies, we work with data from specialized databases provided by credited and established vendors within the industry.

Fund Flows

Market Mapping

Customised benchmarking comparison

Regulatory Rules

What fund buyers are looking at

Budgeting

House Views

Distribution Models

Poor operational infrastructure can be a drag on performance and service level. Since interdependencies exist between operational risk and other risk categories, operational failures tend to result in large losses. This is especially important since we are in an environment with increased regulatory requirements for operational risk. Our Investment Fund Centre has experience in performing ODD assessments for investors and has helped prepare asset managers for ODD requests in the APAC region.

A robust and well-designed distribution strategy should identify the specific requirements and best practices of each local target market for the funds you wish to institute. Our analysis of local markets and key distribution channels (whether direct or via partnerships), along with current best practices, will help you develop a distribution strategy that will maximise your opportunities for success.

PwC’s monthly Market Research Digest 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.

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Armin ChokseyPartner, Asian Investment Fund Centre & Market Research Centre LeaderPwC Singapore+65 6236 4648 [email protected]

© 2019 PricewaterhouseCoopers LLP. All rights reserved. “PricewaterhouseCoopers” and “PwC” refer to the network of member firms of PricewaterhouseCoopers International Limited (PwCIL), or, as the context requires, individual member firms of the PwC network. Each member firm is a separate legal entity and does not act as an agent of PwCIL or any other member firm.

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

Ivy PanManager, Market Research CentrePwC Singapore+65 8809 [email protected]

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