Everyone is mesmerised by the Asian growth story. The emerging middle classes, hundreds of millions of new consumers and, not the least, high fees for funds management services.
On the surface, Asia looks like the place to be for a sophisticated funds management firm using the latest investment technology in its strategies and with sufficient capital to take a long-term view on its expansion.
But history shows many western firms make some fundamental mistakes when they embark on an Asian expansion plan.
According to Chris Ryan, one of the first mistakes managers make is in selecting their Asian headquarters. They tend to take the easy road rather the one more likely to deliver long-term growth.
Ryan is a former head of ING Investment Management in Asia Pacific who recently departed Hong Kong after 15 years there to return to his native Australia as the chief executive of the big independent funds manager Perpetual Trustees. He started his new job this week.
The easiest countries to set up a funds management shop, apart from Australia, are Hong Kong and Singapore. Both have a high proportion of their populations which speak English and both are gateways for foreign capital, especially Hong Kong. But Hong Kong has a population of about seven million and Singapore three million.
Australia, with a population of 23 million and the largest pool of pension assets in the region, is in almost the same time zone as China, say, but it’s at least 12 hours on a direct flight from Sydney, if you can get a direct flight.
Taiwan, on the other hand, also with a population of 23 million, has about 40 per cent of its GDP linked to China and, political differences aside, they all speak more-or-less the same language. Korea, with a population of 50 million and with the best-educated people in Asia (Korea spends about 8 per cent of its GDP on education), is also nearby.
Another mistake is to think of Asia has an homogenous entity. It’s not. Cultural differences are as stark as they are, say, between France and the UK or Germany. And structural differences abound.
One common element among Asian countries should also give managers food for thought: their institutional markets are very small. A manufacturing-oriented funds manager will have a target of fewer than 50 pension funds across Asia excluding Australia and Japan. In China itself, there are three funds only that matter, all government controlled – SAFE, NCSSF and the CIC. In India there are virtually none.
It’s true that the Asian-domiciled managers, banks and insurance companies also represent sources of sub-advisory funds and potential joint-venture partners for retail distribution, but they’re not fond of outsourcing if they can avoid it.
There are about 60 Chinese-owned managers, mostly with part- or sole-government ownership. One of the largest is China Asset Management Company, which is 100 per cent government-owned, with about $40 billion under management. It had T. Rowe Price, a quality global manager, as its sub-advisor for several years but terminated the contract in May last year after recruiting a number of analysts to perform the role themselves from Beijing.
It is true there are amazing opportunities for all sorts of financial services firms in Asia. Foreign managers should remember, however, that the whole world is beating a path to their door.