2018 was a strong growth year in Asia-Pacific. Asian mutual fund assets grew 8.2% to USD3.67 trillion between January and September 2018, and APAC hedge fund launches have increased. A recent McKinsey report estimated that 90% of financial assets in APAC remain outside of the asset management industry, which creates an enormous opportunity.
We at SS&C Eze have worked with asset managers in APAC for 11 years, and over that time, we’ve seen the industry mature, improve and become more institutionalized. Despite a challenging trading environment last year, we’ve seen a lot of innovation across the market that has helped many firms thrive.
We are now witnessing the next step in the evolution of this industry. Here are some key trends we are watching in the space:
Product Growth: Focus on ETFs
ETFs have been proliferating and enjoying widespread adoption in Asia thanks to their ease of use, cost-effectiveness and liquidity. With the sheer number of institutional investors in the region and their growing demand for low-fee products for portfolio allocation, we believe this trend will continue in the coming years. Indeed, some project ETF assets in APAC will quadruple by 2025 to USD1.9 trillion.
At the same time, institutional adoption of ETFs is nascent in Asia-Pacific, which creates a big opportunity for Asian investment managers to deliver such products. Efficiency and transparency will be key for managers wishing to enter the space. We believe that with the right technology, those looking to diversify their investment offerings with ETFs will be in a good position to take advantage of the growth trend in the space. We’ll delve deeper into this topic later on.
Long-Only Managers Go Global
The traditional investment management space in APAC is still maturing, but trends indicate these institutional managers are coming into full force. Institutional assets available to asset managers in APAC topped USD3 trillion this year, as central banks, large pension funds and other institutions continued to diversify portfolios and outsource assets. Much of this trend has been accompanied by increased risk appetite among institutions and relaxed regulations that have allowed them to invest outside of the traditionally-accepted domestic strategies. This is a big opportunity for Asian asset managers to offer offshore funds that will take advantage of investment opportunities globally.
We’ve written about Australian asset managers launching internationally-focused funds; we believe this is happening more and more in other parts of Asia-Pacific as well. For instance, China’s lifting of the QDII quotas on offshore investments is widely expected to create a proliferation of new offshore products. There is certainly appetite from institutions seeking higher return from investments outside of their home countries.
To ensure success, investment firms need to focus on ensuring they have the infrastructure in place to handle trading in multiple jurisdictions, be able to manage foreign regulations, and be able to reconcile data across divisions reliably and efficiently. However, the degree of automation required to make this happen is still lacking at multiple firms. Luckily, we see many managers beginning to review investment management systems.
Regulation & Transparency
Although most regulatory discussions in Asia are following the lead of other parts of the globe, we believe that ongoing regional regulatory scrutiny remains a concern. There is continued focus on transparency, bolstered by MiFID II-mandated practices becoming commonplace around the globe. Additionally, in moves similar to Europe, regulators in China, Singapore and Malaysia are looking at personal executive accountability for firms’ conduct. Moreover, recent changes to Hong Kong’s Fund Manager Code of Conduct requires managers to enhance securities lending and repo policies, custody, liquidity and risk management, and bolster disclosures of leverage.
As a result, we anticipate a continued focus on best execution, transparency and commission management. We are having more conversations with clients about transaction cost analysis, liquidity reporting, broker budgeting and research management.
All of these developments coincide with an increased focus on operational efficiency we are seeing among our clients. Gone are the days when firms can efficiently perform trading, accounting, reconciliations and other processes manually. Operational efficiency serves as a valuable differentiator for investment managers, lowering their operational risks and minimizing their total cost of ownership.
With expected asset growth and ever more competitive environment, investment managers are starting see the value in operations becoming a source of alpha, delivering superior performance through streamlining their processes, realizing efficiencies and creating smoother workflows. We are seeing more clients reevaluating their existing investment management solutions to ensure their cost-effectiveness and efficiency. We believe a strong system that’s designed to accommodate a wide variety of scenarios and grow with the investment manager's operation in the long run ensures managers can quickly position themselves to stand out in this growth environment.
We’ll be delving into these topics and more APAC-specific developments over the coming months. To stay on top of SS&C Eze news, subscribe to our blog.