Investments in UCITS funds are booming in the Asia-Pacific (APAC) region1, but to enjoy success fund managers need to tailor their efforts to the differences and preferences of individual markets rather than trying a regional approach.
This was the key takeaway in a webinar – titled Navigating the UCITS Distribution Landscape: Spotlight on APAC – hosted by Killian Lonergan, Head of Distribution Intelligence at Brown Brothers Harriman in conversation with Yoon Ng, Principal, Distribution Insight APAC at Broadridge Financial Solutions in Singapore.
Ng noted that the APAC market for UCITS funds had reached only $200 billion in assets under management (AUM) 10 years ago, but has since tripled to nearly $600 billion, growing at 13% a year. Even more impressive is that organic growth2 accounts for nearly 80% of the overall growth. “It has been very rewarding for those early entrants who have been getting the majority of flows,” she said.
Lonergan noted that depending on an asset manager’s primary target in APAC, they had to think about different strategies and ways of accessing individual markets.
Ng said that there were three major approaches that successful managers had adopted in APAC: direct sales, indirect sales and local approaches.
- Direct model. This approach focusses on managers distributing their own cross-border funds directly. “The market is very receptive to it and there are a lot of distributors and private banks you can tap into,” Ng said. The primary markets for the direct model are Singapore, Hong Kong and Taiwan, the largest cross-border hubs in APAC.
- Indirect model. Using feeder funds and sub-advisors using a “wrapper” model. This approach is prevalent in markets such as Japan and Southeast Asia (e.g., Malaysia and Thailand) where foreign managers work with domestic managers via sub-advisory opportunities to complement their lack of global investment capabilities.
- Local model. This is common in markets like China and India where investors are biased towards domestic investment due to regulatory constraints. Cross-border funds are rarely used and global managers need to set up local manufacturing capabilities to access opportunities.
Choosing the Right Approach
Lonergan said managers tend to succeed by focusing on one of these approaches instead of trying to market using all three models at once. He said the country with the highest number of direct sales using foreign-registered funds continues to be Singapore, where managers are using it as a hub for the region, more so recently than Hong Kong. Japan requires substantial relationship building with local players, a process that can require a long lead time.
Lonergan noted that some large managers had made a decades-long commitment to China, where partnering also requires a great deal of relationship building, but small and medium-sized fund managers were mostly still sitting out the China market because of the difficulties achieving a foothold.
Offering a Wider Toolkit
Ng emphasized that asset gathering has become much tougher in the APAC area and managers should employ a very precise strategy and make a focused effort. She noted that whereas 10 years ago there were only 40+ managers in the region, there are now more than 80, but the top 10 managers account for 90% of the assets, revealing significant inequality between fund managers. “Being a median manager and just playing along is no longer sufficient,” she said. “You have to know what your strategic strengths are, understand the demand in terms of individual markets and be very clear about which distributor you are looking to tie up with.”
Ng said selling to APAC has become trickier in the last few months because of market volatility and her firm has identified what she called four external fragilities that are having the greatest impact on the asset management industry and UCITS funds: the disruption of global stability, the growing risk of stagflation, climate change and interest in environmental, social and governance issues and the growing inequality among emerging and developed markets.
While UCITS funds are among the easiest to sell across multiple APAC markets, the delivery mechanism may have to be changed, she said. “You have to think of UCITS not just as an offering itself, but UCITS funds can be a building block within a fund wrapper or a managed account or discretionary portfolio,” she added. With the changing environment, managers need to offer a wider tool kit for different outcomes such as income, downside protection or different asset classes (private markets).
Ng said ESG is also becoming an important factor for investors. Lonergan noted that within the APAC region, as in Europe and the United States, there are no clear agreed definitions for what counts as an ESG investment, although individual countries such as Singapore, Japan and Hong Kong are attempting to use standardized criteria.
What Makes a Successful Distribution Strategy?
The discussion turned to what constitutes a successful distribution strategy for managers in the region. Ng said there were three primary ingredients to a successful distribution strategy:
- Products. There has to be a deep understanding of the current interest in various products as well as long-term demand for them. In Asia, she noted, there is a very high “churn” rate between funds. Managers should look carefully at how they are placing products vis-a-vis distributors in terms of what the product gaps are.
- Service. Ranging from sales and marketing to client servicing itself. Who are the key clients? Often it is a bank but recently there has been a shift to non-bank distribution channels, especially in China and India. In bank-dominated markets like Hong Kong and Singapore, banks are undergoing a virtual transformation and providing a more holistic solution customized for individuals. Managers need to understand how to work with these online channels and make available tailored offerings for their investors.
- Brand. “It’s defining specific product or service attributes that outlines the value you can provide to your clients,” Ng said. It’s often a combination of factors, from performance to size as well as local knowledge.
Lonergan said that among managers who work in APAC there is an “expectation of personalization,” including the personal relationship between the manager and distribution partner, such as a bank or advisor. “There is a greater expectation for personalization in Asia than in any other part of the world,” he said.
Feedback that Brown Brothers Harriman has received from managers is that in APAC there is little tolerance for mistakes or tardiness on anything from transactions to marketing materials. “Understanding that aspect of the culture is exceptionally important,” Lonergan said.
2 Organic growth is AuM growth from net subscription activity and market movements rather than fund mergers and acquisitions
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