These three key trends will change the way asset managers invest in APAC in 2022
For asset managers wanting to get a strategic foothold in APAC over the next year, three key trends will shape the landscape of the region’s asset management industry, according to a report from State Street.
- The continued emergence of China
Foreign asset managers have long sought a share of China’s growing pool of investable assets, despite numerous limitations on foreign ownership limits on fund management companies (FMC). In 2020, however, China fully removed all limits and for managers, this is a game-changer.
In just two decades, since the first closed-end funds were launched in China in 1998, assets under management (AUM) grew from around US$1 billion to around US$16 trillion, according to estimates by consultants Oliver Wyman.
Foreign managers were restricted to a minority shareholding in FMCs until 2017 when they were permitted to own a 51 percent holding. This led to many overseas managers entering FMC joint ventures (JV) with local, Chinese partner firms as a means of reaching Chinese clients. For those not ready to establish an onshore presence, creating investment outposts in Hong Kong was a common strategy to access the China market, aided by the introduction of the Stock Connect and Bond Connect programs.
Today, however, global managers have the option to take varied approaches to market entry, from JVs and distribution partnerships to wholly-owned ventures.
“The ability to launch wholly-owned mutual fund businesses, which, unlike private funds, will have no cap on the number of assets they can raise, may encourage more firms to go directly into China without coming to Hong Kong at all,” says Joanne Chen, State Street’s location head in China. “Crucially, China has developed large talent pools over the last 20 years, so it’s increasingly feasible for global managers to recruit onshore talent to run those businesses.”
- ESG goes mainstream
While Europe and the United States have led the ESG investment boom over the last decade, for asset managers in 2022, APAC is the market to watch. In 2021 ESG assets under management (AUM) more than doubled and the market continues to grow rapidly. As of June 2021, there was US$88.3 billion in sustainable AUM in Asia, Japan, Australia and New Zealand — a 240 percent increase from the second quarter of 2020.
These figures come from The Next Chapter report by State Street Global Advisors, which found institutional investors in APAC were just as likely as those in Europe and North America to have set portfolio decarbonisation targets, with 20 percent having made pledges. In APAC, 70 percent of the firms yet to set targets have a plan to introduce them within the next 12 months, outstripping the global figure of 63 percent.
It’s worth noting how Asian countries have suffered some of the worst effects of climate change globally over the last 20 years. It’s little wonder APAC asset owners are leading the drive for greater ESG integration while investors in the region are accelerating their action.
- Digitalisation transforms industry operating models
The unique distribution demands of the APAC market will require asset managers to upgrade their digital capabilities and transform data management practices to succeed. It is important to understand how quickly the landscape is changing to cater to the market’s digital demands.
“Going onshore in China, you’re probably entering the world’s most digital asset management market in terms of buying behaviour and interaction with investment products,” says Neil Macdonald, State Street’s head of Asset Manager Segment in APAC. “The question the C-suite team has to ask itself is: ‘to what extent are we willing to customize our operating model for a single market?’”
Digital platforms are playing a huge part in shaping China’s and APAC’s fund distribution and wealth management market. Some fund managers have begun to leverage these platforms such as Alipay and WeChat Pay to reach China and APACs tech-savvy retail market.
Similarly, the robo-advisory market is growing rapidly in Asia and assets are flocking to providers. Asset managers may need to either modernise their distribution technology to compete with these players on client experience or partner with them directly to achieve cut-through in several Asian markets. Digital marketing skills will be critical to success, as will the ability to integrate seamlessly with third-party distribution platforms.
The use of machine learning and artificial intelligence (AI) to augment the trading and investment process, drive alpha and better risk management, is increasingly featured in asset managers’ budget priorities.
State Street’s latest global industry survey finds that APAC managers are intent on onboarding these technologies. They say that improving investment performance analytics and risk analytics are top priorities for their technology investment over the next 12 months, along with better integration of IT systems across asset classes and geographies. Additionally, 66 percent say that investing in emerging technologies such as AI will be essential to achieving those aims.
Positioned for success
For asset managers in APAC, China’s continuous emergence, ESG investing and digital transformation present huge opportunities. Managers and companies such as State Street that cater to rapidly changing investor demands will be in the best position to succeed, while those that choose not to adapt, risk falling behind.
One thing is clear: this is an opportune time for managers and the best-in-class asset management firms to position themselves for accelerated sustainable growth and lead the investment industry in APAC through the next chapter.
- State Street has researched and identified three key trends for the APAC asset management industry. Download the guide The Next Chapter: Three trends Asia’s Asset Management Industry here.