FundForward - Asia 2015

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CONTENTS WHAT IS THE FUTURE FOR CHINESE ASSET MANAGEMENT?

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An objective VIEW

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Tug-o-war or Formula One?

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Why Asian firms will overcome risk management challenges

What is the Future for Chinese Asset Management?

Special thanks and credits

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Industry Predictions

FundForward Asia Editor:

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Greater China’s Fund Industry in the Year of the Sheep and Beyond

Editorial Staff:

Lucy Eldred

Sarah Armstrong, Sarah Kelly

An objective VIEW

Contributors: Richard Harris,

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Yoon Ng, Jonathan Ha, Abhi Shroff, Avi Nachmany, Jonathan Beckett

What do you think should be the top considerations for fund managers globally?

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Top 3 Priorities for Asset Managers in 2015

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Planning for 2020: The Shifts towards Asset Allocation Solutions, and their Implications

Sponsors: Brown Brothers Harriman, BNP Paribas, CNBC, Jupiter Asset Management, UK Trade and Investment Sponsorship Team: Edward Jones, James Roberts

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Asian Investors Investing by Emotion

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Tug-o-war or Formula One?

LockOn Productions

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Jupiter Global Emerging Markets Unconstrained

Artistic Director:

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A Message about Fund Management in the UK

Design Team:

Chris Shields, LockOn Productions

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Print Team: Trio Offset

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WELCOME

2015

Dear FundForum Friend, Welcome to the 2nd edition of the FundForward Asia magazine, on behalf of myself and the entire FundForum Asia team. We hope you will find this publication a useful addition to your conference experience and a source of exclusive news, insight and research from some of our leading speakers and supporters.

We have a great selection of speakers and networking events lined up for this year’s FundForum Asia. Ensure you get the most out of the year’s conference programme by attending what is most relevant to you and your business.

• Our dual Stream Summit day (Monday, 13 April) is growing year on year and is an integral part of the FundForum experience. Crucial for anyone interested in distribution in Asia and/or the developments in mainland China. Not to be missed!

• Day 1 of the Main conference (Tuesday, 14 April) will focus on the global business of asset management with C-level perspectives from around the world.

We have focussed a lot of energy this year in making FundForum a more interactive experience, one where you will benefit from not only high level perspectives, but also from drill-down exclusive insights. Don’t miss our closed-door sessions, “Chatham House Rules” boardroom meetings, and small group workshops for a more rewarding intellectual experience Let’s not forget the importance of networking!

Be sure to sign up for our expert lunchtables, off the record sessions and showcases, to ensure you meet the right people for your business.

Here’s to a great FundForum Asia 2015.

• Day 2 of the Main conference (Wednesday, 15 April) will conversely look at the specific issues dominating the Asian investment and wealth management business with some of the industry’s most prestigious names.

• On Day 3 of the Main conference (Thursday 16 April) we change focus away from the business of asset management towards investment and asset allocation strategy. Key CIOs and star fund managers will share their views on the optimum way to maximise return in the current environment.

Sarah Armstrong Conference Director, FundForum Asia 2015

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Why Asian firms will overcome

risk management

challenges

Industry firms should use increased regulation as an opportunity to establish more effective risk management functions, say Mostapha Tahiri and Madhu Gayer, both of BNP Paribas Securities Services.

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ncreased regulation is changing how investment firms manage and understand risk. But has this regulation created better management, transparency and understanding of risk? Can we say that investment risk is heading towards being under control? We believe significant progress has been made and will continue going forward – as long as asset owners, managers and service providers build effective risk management frameworks that can better manage risks.

Overall, investment risks come in many guises – issuer, credit, counterparty, country, volatility, liquidity, safekeeping, operational, and regulatory, to name but a few. However, new regulations aim to address the multiple types of risk faced by Asian investors today.

In the past, many asset owners, managers and advisors were not fully aware of the breadth of ‘hidden’ risks in the investment value chain.

For example, securities collateral was given (by way of security interest or even title transfer) to clearers, prime brokers, or international central securities depositories acting as tri-party collateral agents. During this era, collateral was not always systematically traced, measured and integrated into counterparty risk modelling tools, as it is today.

To more proactively address these risks, many stakeholders in the asset value chain have changed their role. Now as a result of Emir II and the Dodd-Frank Act, trade repositories and OTC clearers now play a central role in the risk management framework. In addition, some of the more traditional stakeholders have expanded their

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risk management duties. For example, European depositary banks are now required to help safeguard investors of alternative investment funds by offering an independent oversight function and by verifying ownership of unlisted assets.

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Regulators are demanding more transparency not just at the fund manager level, but also with institutional investors” These funds include private equity, real estate, infrastructure and credit strategies, as well as single hedge funds and funds of hedge funds.

There remains, of course, a range of the aforementioned ‘visible’ risks such as issuer, credit and counterparty challenges, and so forth. To combat these issues and address new regulations such as the Alternative Investment Fund Managers Directive, and amendments, firms can embrace rules governing the independence of the fund managers’ and management companies’ risk functions.

Consider that although regulators have always focused on risk, new regulations are far more comprehensive, explicit and prescriptive.

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Is regulation ‘contagious’?

This explicit focus on managing investment risk is spreading worldwide, with risks being seen holistically in all shapes and forms. In Asia, we have seen Singapore regulators take a proactive stance in issuing a consultation paper on a complexityrisk ratings framework. The report’s findings can be applied for all investment products offered to investors in Singapore, and therefore highlight the risks and complexities of investment products.

Meanwhile, regulators are demanding more transparency not just at the fund manager level, but also with institutional investors. For example, Europe’s Institutions for Occupational Retirement Provision II in its current proposed form will require pension schemes in Europe to produce a risk evaluation report covering a range of risks, including longevity, market, credit, liquidity and operational risk. As such, pension schemes will have to better articulate their approach to risk management. These developments will likely spread around the globe.

All of this has obvious benefits, not the least being increased transparency and asset safety. However, taken by themselves, risk indicators, quantitative measures and risk reports cannot eliminate risk.

Instead, they can provide a framework to mitigate and manage acceptable risk. Ultimately, effective risk frameworks will require, in addition to tangible outputs, the right intellectual and human capital inputs, along with the right governance framework.

investment risk solutions will come from these evolving engagement models, not the least being closer cooperation between all parties involved in oversight and control.

Mostapha Tahiri, Head of Location, Singapore, BNP Paribas Securities Services Has more than 15 years’ experience in the securities and fund services industry. In his current capacity, he holds two key roles: Chief Executive Officer of BNP Paribas Securities Services Singapore Branch; and Regional Head of the Asset and Fund Services business line in Asia.

Mostapha Tahiri will be presenting in the Fund Operations Stream at 3pm, Tuesday 14th April.

What’s next?

Regulation has and will continue to play a key part in managing risk. The ‘contagion’ of protection mechanisms across the industry is good for investors and addresses hidden risks.

However risk management remains a ‘people business’ where experience, instinct and a real endto-end understanding of financial markets is key.

Therefore, we believe a collaborative approach is more important than ever in today’s changing world.

In the end, we see new regulations as opportunities to establish more effective risk management functions in the industry. And amid this movement, industry firms must continue to support their investment processes, while they assume their role in the risk control framework established by the regulators. It may even be the case that stronger

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Madhu Gayer, Head of Investment Reporting and Performance, Asia Pacific, BNP Paribas Securities Services Madhu is the Head of Investment Reporting and Performance for Asia Pacific, BNP Paribas Securities Services and is based in Singapore. In this role, he works with large institutional investors and asset managers in the field of investment risk, performance and associated investment analytics, providing technical consulting, thought leadership and investment analysis.

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What Is the future view for Chinese asset management?

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Future view for Chinese Asset Management

Industry predictions:

What’s the future view for Chinese asset management?

The Chinese financial sector has experienced an incredible period of rapid growth in the past three decades, one that is arguably unparalleled by any other market in the world. With the Chinese market pinned to continue its rapid and exponential growth, we asked Jonathan Ha, CEO of Red Pulse to give us his predictions for the Chinese asset management sector.

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early everyone can agree that China’s asset management industry represents one of the greatest growth opportunities for the next two decades. Its current size doesn’t yet come close to reflecting the massive growth in wealth that has taken place over a single generation.

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Within a decade, China will make major moves to fully open its capital account. Just recently, the central bank PBoC announced that companies in the Shanghai FTZ would be allowed to directly seek financing offshore in foreign currency. Cross-border programs such as QDII, QFII, RQFII, QDLP, RQDII and Stock Connect will continue to proliferate and

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Future view for Chinese Asset Management

expand, but within the decade will be consolidated, with streamlined rules that apply across the board.

Eventually, such “cross-border” programs will be done away with altogether.

business” from their foreign counterparts, while foreign firms are more than happy to have a brand and platform they can fully own and control, and it’s likely that State Council will give the formal nod to allow this within the next few years.

At the same time, the largest Chinese asset managers will no longer be considered “Chinese”.

Global financial institutions are multinational by nature, and within five years’ time, Chinese financial conglomerates will follow suit. Case in point, Chinese firms such as Anbang have been on a buying spree recently, aggressively acquiring asset management platforms and high-profile real estate across the globe. Global firms will have to innovate in order to stay competitive, or be swallowed up by these new players.

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Global financial institutions are multinational by nature, and within five years’ time, Chinese financial conglomerates will follow suit” Finally, Sino-foreign joint ventures in China will soon become a thing of the past. Especially for the asset management industry, the JV structure has already begun to outlive its usefulness – with several high profile disbandments having already taken place.

Chinese partners no longer need to “learn the

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Jonathan Ha, CEO, Red Pulse Jonathan Ha has over a decade of strategy and management consulting experience across various industries, with a specialisation in financial service. Ha is the CEO of Red Pulse, a retail-focused market intelligence platform covering China.

Jonathan Ha will be presenting at the China Summit taking place Monday 13th April.

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Future view for Chinese Asset Management

Greater China’s Fund Industry in the Year of

the Sheep and Beyond

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n the Chinese Zodiac, 2015 marks the Year of the Sheep, which is meant to symbolize balance and harmony. Following the ups and downs of the past few years, this would be a welcome balancing effect for the financial community. However, we do not anticipate any calm in market activity in Greater China or Hong Kong, which is positioned as one of Greater China’s fund centers, and is becoming a cross-border fund hub in its own right. What will it take for Hong Kong to complete its journey?

Liberalizing Capital Markets Since the creation of the first offshore RMB deposit market over a decade ago, we have seen remarkable growth in the liberalization of China’s

capital markets. The creation of the offshore RMB deposit market in Hong Kong blossomed into the CNH offshore markets that exist today in Hong Kong, Singapore, Taiwan, London, and other key centers across Asia and Europe. Currently, the Chinese Yuan is the fifth most accepted currency for trade settlement1, with the CNH offshore markets typically trading over USD 4 billion a day.2 First-mover advantage has proved opportune for Hong Kong, as over 60% of CNH flows originate there.3 With the China-Hong Kong Mutual Recognition platform expected to launch in the near future, Hong Kong is not only well positioned to be a center of cross-border fund flows in Greater China, but internationally.

1. Based on BBH estimates. China Daily, Jiang Xueqing, Cross-Border Yuan Settlement Growing Rapidly, 23 November 2014 2. The Wall Street Journal, Richard Silk, Yuan Is World’s Fifth Payments Currency, 29 January 2015.

3. Brown Brothers Harriman Inter-bank FX counterparties.

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Future view for Chinese Asset Management

Infrastructure: Broadening the Scope of Cross-Border Portfolio Investments Over the same period, investment programs into and out of China have seen similar strategic developments with the establishment of QDII, QFII, RQFII, and most recently QDIE, QDLP, and Stock Connect investment channels. We have seen crossborder investor appetite broaden further, reaching not only the shores of Europe and the US, but also to Latin America. Last year, the Chilean regulator, Comisión Clasificadora de Riesgo, approved a Chinese asset manager’s ETF for distribution to Chilean pensions, potentially opening the door to Latin America’s growing appetite for Chinese funds.

With the ChinaHong Kong Mutual Recognition platform expected to launch in the near future, Hong Kong is not only well positioned to be a center of cross-border fund flows in Greater China, but internationally”

investor with mobile capability. Most importantly, the platform will need to mitigate operational and market risks as volumes increase over a potentially wider population.

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Technology: Driving Change in Financial Markets Meanwhile, technology has been a driver of change in financial markets. Taiwan offers an example of this by significantly automating fund distribution in the last five years. The next generation of platforms will need to apply more technology to cover several jurisdictions and time zones, and efficiently accommodate an increasingly tech-savvy

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Michael Tsang, Senior Vice President, Brown Brothers Harriman Michael Tsang has almost 30 years of experience in financial services. He joined Brown Brothers Harriman in 2015 to reinforce the firm’s business development team in Greater China.

Michael Tsang will be presenting ‘Laying the Tracks for Great China’s Cross-Border through Train’ at the China Summit taking place Monday 13th April.

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AN OBJECTIVE TAKE ON GLOBAL FUND management What do you think should be the top considerations for fund managers globally?

This is the question we posed to Yoon Ng, Abhi Shroff and Avi Nachmany in the interests of obtaining an objective view of the current state of the fund management sector, and understanding what is required of the fund management sector in coming years.

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An objective take on global fund management

What do you think Should be the top considerations

for fund managers globally?

With global mutual assets racking up double-digit growth for the third year running and overall assets crossing US$27 trillion for the first time, it seems the industry is well and truly back on the expansion track.

Exhibit 1: Global Mutual Fund Assets under Management, 2010-2014

% CHANGE

Exhibit 2: Global Markets by % AUM Growth in 2014

10.0%

12.7%

12.2%

Most countries have something to cheer about given that only four out of the 35 markets we track, namely France, Greece, Portugal and Russia, bled assets.

Exhibit 2: Global Markets by % AUM Growth in 2014 Firms are looking beyond their domestic and regional shores for growth and that applies both eastwards and westwards. Yet there are issues to deal with even when one’s coffers are full – how, what and where to look for growth? One would be foolhardy not to pay attention to these issues.

Distribution: The online challenge For Europeans, names like Hargreaves Lansdown, Nutmeg and Moneyfarm will ring a bell. And for those in China, you’ll most likely own a Bao (money market fund) and be aware of the turf war between e-commerce giants, Alibaba and Tencent. Roboadvisers are grabbing headlines in the United States with their strong growth. Online distribution seems to be finally coming of age, though it’s at

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An objective take on global fund management

one’s peril to ignore the traditional channels. Keep a check on regulatory changes and maintain the “virtual” human touch - they will hold key to success.

Exhibit 5: Breakdown of % AUM Change for China and India, YTD 2014

Exhibit 3: Future of European Platform Assets Over the Next Three Years, 2014

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Products: Think retirement and income generation

And we have the elephant in the room - regulations.

They are omnipotent and not to mention, expensive.

From Solvency II in Europe which has caused major upheaval in the insurance investment space to investment liberalisation moves in Asian insurance, managers have come to understand regulators can both be your friend and foe. As Warren Buffett, the Oracle of Omaha warns, “Be fearful when others are greedy and greedy when others are fearful.” 2015 may be a good time to heed the sage’s advice – always ask growth at what cost rather growth at all cost.

The death knell has been sounded umpteen times for the mutual fund industry and the active-passive debate is starting to sound old. The industry has always evolved to deal with new challenges, be it lowering fees, being more outcome oriented or borrowing from its alternative peers (liquid alternatives). The challenge in Asia is more fundamental and that involves increasing mutual fund penetration and asset persistency. Incomegenerating assets will continue to gain traction and designing solutions for retirement will be crucial for the next stage of growth.

Exhibit 4: Global Mutual Fund Assets Under Management by Investment Objective, 2009–2017E

Market expansion: Weigh all options The idea of not one but three fund passports in Asia may seem like gold dust at first glance. But those familiar with the intricacies will understand that beyond operational and tax issues, there are other obstacles like distribution and investor preference to grapple with. Similarly, strong top line growth from markets like China and India may attract interest from global managers though growth in the two markets have come from money market funds and stock market rally respectively – neither are accessible nor sustainable.

Yoon Ng, Head of Research, Asia, Cerulli Associates Yoon is responsible for planning and expanding Cerulli’s Asia research publication and has taken on diverse roles in Cerulli, from a quant analyst to research writer and now, managing a team of analysts.

Yoon Ng will be presenting a research piece at 10am on Wednesday 15th April.

All statistics, figures and insights provided by Yoon Ng. Graphs styled by ICBI

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An objective take on global fund management

Top 3 Priorities for

Asset Managers in 2015 Every year, Greenwich Associates interview more than 2,000 institutional investors around the world about their investment practices and their relationships with asset managers. With this in mind, they have been able to identify the three key issues that should be top of mind among global asset management executives in 2015.

1. Brand and Value Proposition In the past, branding was not a topic of much concern for asset management firms, save those competing for retail dollars. However, as competition continues to intensify, clearly delineating your value proposition has never been more important. To assist in this process, asset management firms should adopt a four-phase approach to brand development.

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Brand is a journey that requires ongoing support from the entire organisation”

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First, in the define stage, it’s important for a firm to agree on those key elements that make it distinctive in the market. The next step is to confirm the value proposition, externally testing the internal view developed in the previous stage to confirm that perception is reality. In the activate stage, a formal plan is developed to convey a firm’s unique positioning in the market to both internal and external constituents. Managers then must then continually monitor the progress of its messaging and measure performance against the proposition they promised to deliver. Brand is a journey that requires on-going support from the entire organisation.

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An objective take on global fund management

2. Building Trusted Advisor Relationships Given resource constraints and an increasingly complex market, institutional investors are looking to asset managers more than ever for new approaches and innovative products. This represents an important opportunity for asset managers to work with investors in a more holistic manner. As a result, firms of all sizes are reviewing how best to bring together investment, sales, relationship management and senior management resources to effectively meet investors’ needs. Managers benefit from a stronger bond with investors, helping in the retention of assets.

As this transformation continues to evolve, managers (multi-strategy and boutique alike) are conducting strategic reviews to assess their current capabilities to best understand how to win in this evolving market.

Investor needs and objectives among client types have splintered dramatically since the global financial crisis, creating opportunities for asset managers with approaches based on rigorous client segmentation. Managers historically structured their coverage models based on an investor’s channel and/or demographics, but, today, leading managers are leveraging statistical approaches to identify client behaviors and better understand commonalities and differences between investors.

An analysis of investors’ attitudes and characteristics will help managers design products and services that better address existing needs.

Given the transformational changes underway in the industry, the winning firms will ultimately have the greatest differentiation and deepest, most robust client relationships.

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Today, leading managers are leveraging statistical approaches to identify client behaviors and better understand commonalities and differences between investors” 3. Improving Sales Effectiveness Industry shifts are driving meaningful change with regard to sales practices. Key questions managers are considering include: are our sales professionals capable of functioning outside the traditional, transactional sales approach? Do they have the investment savvy needed to talk “solutions?” Are we prepared to reduce the number of clients and targets in each professional’s portfolio? Does our sales compensation structure incentivize the right behaviors?

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Abhi Shroff, Managing Director, Greenwich Associates Abhi Shroff is a Partner and Managing Director at Greenwich Associates responsible for its Asia-Pacific (ex-Japan) business. Abhi leads the firm’s investment management research and advisory business in the region.

Abhi Shroff will be discussing the evolving landscapes and successful partnering at the New Economics of Fund Distribution in Asia Summit on Monday 13th April.

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An objective take on global fund management

Planning for 2020:

The Shifts towards Asset Allocation

Solutions, and Their Implications

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nvestors, wealth managers, and regulators are increasingly shifting from the appeal of individual funds, to the prudence of asset allocation ‘solutions.’ This trend is most evidenced in markets driven by retirement investing. For example, in the U.S., over 80% of fund industry sales through financial advisors are in “wrapped” mutual funds, or in a single “solution” fund with embedded asset allocation (in 2014, 63% of US fund sales were in stock/balanced funds). The dependence on asset allocation solutions and the stock/bond equilibrium is evolving, at various degrees, in other countries. For example, Strategic Insight’s data for

nearly $1.2 trillion of cross-border fund sales shows that stock and mixed-asset funds accounted for nearly half of such fund sales in 2014 (importantly, data shows that redemption rates of mixed funds were less than half those experienced by either stock or bond funds; in Asia, mixed-asset funds had one-third lower redemption rates than stock funds.)

But each market experiences the emergence of asset allocation ‘solutions’ and stock/bond exposure differently. In the UK last year, bond funds’ share of cross-border fund sales rose, from about 40% to nearly 55% late in 2014. Conversely

Graph 1: Long-term Fund Net Flows by Market in Asia, 2014, excluding ETFs and MMFs - In $ Billion 60%

50 Local

40%

20

20%

16

13 10

0

Cross Border

8 9 0

4 6

-2

-5

-20%

-42

-40%

Japan -60%

South East Asia

India

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Hong Kong

Taiwan

Singapore

Korea

China

Source: Strategic Insight estimates, industry associations.

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An objective take on global fund management

in Japan, rising stock prices, appreciating non-Yen assets, and the early path towards fee-based wrap platforms led to increased allocation to stock funds (and away from bond funds, which accounted for just about 30% of 2014 net flows, excluding ETFs).

In the context of an increasingly interconnected global mutual fund industry, these issues (and the potential lessons to be learned from the experiences of other fund markets around the world) should be among those front-and-center for the Asian fund industry in the years ahead.

Graph 1 takes a deeper look at Asian fund market trends. It combines locally domiciled and crossborder funds to chart net flows across individual Asian markets in 2014.

As we look ahead, key opportunities, challenges and questions facing the Asian fund marketplace include: • By 2020, will asset allocation ‘solutions’ become the foundation of ‘investing for the future’ in Asia?

• Will, in parallel, globally harmonized regulatory pressures accelerate the shift to fees-for-service in wrapping such asset allocation (as already evidenced in North America, the UK, Australia, and selectively elsewhere in Europe thus far)?

• How will thematic investing, global diversification, passive and strategic beta, or lower-volatility anchors (fixed-income or liquid alternatives) be combined within asset allocation solutions by increasingly wealthier Asian investors by 2020?

Avi Nachmany, E.V.P, Director of Research, Strategic Insight

• If asset allocation ‘solutions’ become dominant, will captive distributors contract (or expand) access to unaffiliated, strategic investment management partners?

Avi Nachmany oversees global research for Strategic Insight. Avi pioneered the analysis of mutual fund product innovations and their global adoption, as well as research of distribution, fees, and profitability trends, among others.

• What role will a common Asia passport play in such harmonization? And how will the industry and its regulators work together to create an investorcentric growth foundation for the future?

Avi Nachmany will present Strategic Insight’s new research in data, in part focusing on implications of the path towards global harmonization of investors’ preferences and regulatory initiatives, on Tuesday 14th April.

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ASIAN INVESTORS

INVESTING

BY EMOTION Richard Harris explores the habits of Asian investors and the issues that arise when investing based on emotion, rather than experience.

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sian investors show more emotion than a bad soap opera.

One expects new frontier markets to behave like casinos filled with investors with little or no experience. They are the last to panic in and last to panic out of the market. Some of those investors point to the fact that they are already so wealthy that their intuition must be magically better than everybody else’s.

Asian investors should know better because they have some of the longest experience in cross-border stock exchanges. The first Indian stockmarket began over 180 years ago. Hong Kong has been trading since 1891 and trading in Shanghai began in 1866, with interruptions for regime changes.

With that heritage, investors should come more easily to the wisdom of the price earnings ratio, the capital asset pricing model or the Black Scholes equation. The tactics of the charts have passed them by, whilst a Sharpe ratio must be something to do with the kitchen knife.

Asian investors rely on gut feel for their investment decisions – more commonly diagnosed as indigestion. They become anchored to a figure, a phrase, a concept and obsess after that at the expense of a little contrary analysis.

Ten people on our fund management team once bought gold when it was hot, chasing the theory

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that old ladies were filling their teeth to secure their savings. After the price sunk, it became obvious that most old ladies would rather invest it in the Macau casinos than store it.

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But old habits die hard and investors would still rather trust a tip than trust an adviser” Until 20 or so years ago, the average investor tried to feed from the crumbs that fell from the table of the Fat Cats. The main markets of Hong Kong and Singapore now have world-class regulation that creates a level playing field, and many other countries, including China, are catching up. But old habits die hard and investors would still rather trust a tip than trust an adviser.

When they do, they run with the latest idea brought to them by a man in a nice suit and an embossed business card. Or they carefully pick the most obvious investment because it is the primary idea – just before it tanks.

Part of the problem is poor investment advice, often driven by hungry institutions keen to increase market share. They often get the flaky clients that they deserve – who fight back after something goes wrong.

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Risk management often means following the crowd, instilling a herd mentality that makes markets boom and bust. Last year’s 50% boom in Shanghai did not happen on any particular fundamentals. Investors chased the market fearing they would miss the boat.

Banks lent them the money to do it with barely more credit analysis.

“Let’s just do it” was driven by emotion, leading to irrational behaviour.

Everyone talks and gives tips at the Club – and most of the tips are legal as they are unrelated to any inside information. What is strange is that people believe them. Greed overtakes fear.

The failures come from lack of discipline – ignoring simple rules like not putting all your eggs in one basket; sectors, shares or markets. Thinking that you will get out before the next guy, ignoring the wider meaning of the fundamentals and - the big gotcha of recent years - leverage. Why do billionaires continue to make a small fortune from a big one by continuing to make big bets on limited payback instruments using borrowed money - at the top of the market?

Even Asian fund managers are not immune to fixating on the screens from opening bell or closing numbers. That is not investment; that is speculation, even if some of the fund managers can be acceptable speculators. Trading often, jumping in and out of stocks, sectors and countries, shows activity but it’s more professional to put energy into getting just three key decisions right a year.

As a result, there are relatively few unemotional investment professionals in the Asian fund management community regardless of their length of experience. But there are some.

Asia is a behavioural economist’s dream - all the mistakes are here. Naturally, you usually only see them when things go wrong. At the Club, you big up your successes, not the lessons from the failures – and that repeats the whole emotional cycle all over again!

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There is a deficit of trust in Asia of letting go family generated wealth. I’m still waiting for that generational shift from investing by emotion to investing by intellect” Twenty-five years ago, I used to think that the next generation would have more sense as their parents were sending them to Harvard and then Goldman’s.

But a little bit of knowledge is a dangerous thing.

At the age of 30, they will override a staffer with 30 years of experience. It is not surprising that financial investments are much less regarded than sticking with the original business. There is a deficit of trust in Asia of letting go family generated wealth. I’m still waiting for that generational shift from investing by emotion to investing by intellect.

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Richard Harris CEO, Port Shelter Investment Management Richard Harris of Port Shelter has been in the investment industry in Asia for 35 years as an investment manager and expert adviser to both the investment and the legal communities.

Richard Harris will be presenting on the investment habits of Asian clients at 5.30pm on Wednesday 15th April.

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JOIN THE CONVERSATION. with Bernie Lo & Susan Li Anchored by Bernie Lo and Susan Li from Hong Kong, “Squawk Box”, delivers all the news and views of top CEOs, influential asset managers and newsmakers. The programme also launches you into the Asia trading day, covering key market opens, including Tokyo, Hong Kong and Shanghai.

WEEKDAYS

7am (SIN/HK)

CNBC is available on

Ch 78 and

Ch 319.

CNBC Asia Pacific is the Official Broadcast Partner of Fund Forum Asia 2015.

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Alignment within the value chain

Tug-o-war or Formula One? How can we create more alignment within the value chain? Jonathan Beckett outlines 8 different approaches that could be adopted to improve alignment in the fund selection industry.

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lignment? There are two ways I’d like you to think about how we align ourselves within the fund industry. The first is a simple piece of string - does that string represent the shortest, straightest route between investor and the right outcome? The second is a Formula One race, with many cars moving in the same direction but everyone competing to win. Competition is normally held to drive good investor outcomes in absence of collusion. Think, then, of the fund value chain between investor and investment. Between the investor and their investment may be an advisor, a distribution, a platform provider, a fund manager and a fund management firm. Each part takes their fee for the services they provide. Can we say that all parts of the value chain are aligned to the investor?

For argument’s sake, let’s agree for a moment that there are broadly 8 ways to create more alignment in the fund selection industry, from which both intended and unintended consequences can arise.

1. Harmonisation To establish common interests and goals from Investor, Fund Selector, Fund Manager, Distributor and Regulator.

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This has been the utopian goal of the last 30 years, but ignores misalignment and conflicts of interest arising from fees in the value chain. In truth this model has been breaking down since well before the financial crisis, leading to falling trust, falling fee tolerance and rising regulation. It is possible to build harmonisation through fund managers self-investing into their own funds. The ratio of that investment to total wealth tends to rise along managers of smaller funds and boutique owner-managers. However investment and advisory trade bodies have failed to effectively engage investors, a task left incumbent upon intermediaries and distributors to bridge. This model is failing in Europe.

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Investment and advisory trade bodies have failed to effectively engage investors, a task left incumbent upon intermediaries and distributors to bridge”

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2. Optimisation Getting ‘Optimum Economic value’ from asset to investor with the minimum drag of costs.

This presents challenges for advisers in whether to add value through investment, predict suitability, the advice process and or tax and family planning.

“

Contemporary research indicates that historically brokers have made poor fund selectors” Contemporary research indicates that historically brokers have made poor fund selectors. As such, the challenge to active managers is the growing support for the ‘negative sum game’ argument; that passive funds are a superior choice once fees are considered. This has been driven by a wave of academic studies, growing short-termism of investors, and the rise of consumer groups.

3. Institutionalisation More of the value chain serviced under one roof Alignment occurs through the bundling of different parts of the value chain into one product: wealth management, one-stop multi asset solutions with a low advice front process.

This gives the customer a single point of focus to compare service and outcomes. This model is driving advisers to compete with discretionary fund managers, and to compete with distributors. This is exemplified in the growth of ‘Default’ fund culture in the United Kingdom and the rise of wealth manager advisory risk-rated solutions.

4. Consolidation The contraction of the industry to weed out weaker propositions.

This tends to drive falling competition, market leavers, rising merger and acquisition. Recent Lipper data indicates that the fund universe is contracting and it has been globally since the financial crisis. Think about those recent M&A deals; in my Oligopoly Orchestration paper, I noted a gradual move to a scale model from a margin model that will put pressure on smaller firms. A recent Harrington Cooper study questioned wealth managers in the use of boutiques over tried and tested core managers. The study indicated that buying intentions among wealth managers into boutiques was strong, and passive buying intentions were low yet jars with the industry sales numbers. In my paper Core Satellite Conundrum I speculate that the core-satellite model leads to an 80:20 division of assets and flows.

5. Regulation Conformity and setting a broad brush approach to alignment and the dictation of business models.

The Retail Distribution Review is in full effect in the UK, the end game is the end of legacy trail commission, what we call in the UK the ‘sunset’ rules.

Moreover MIFID II will see a number of changes that will impact fund managers, distributors and wealth managers. Anti-bribery rules are also reshaping the relationship between fund manager and fund buyer and we have seen the rise of Independent Governance committees and customer advisory boards, providing an independent challenge to investment outcomes and value for money1.

6. Compression Alignment by reducing fee drag on returns Based on new business, this has by far become the dominant alignment model in the US and Europe.

It is the drive for fee transparency and fee pressure.

The CASS paper on symmetrical performance fees is a watershed moment. Passive funds have been the net winners of this trend and net flow trends are now dominating new fund flows in both Europe and the US. In my paper Coefficients of Inefficiency, I concluded that the total bill of large active manager

1. For those using UCITS, I recommend keeping track of the consultation page on the ESMA website.

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teams has to come down to compete. Meanwhile my paper Key Man Risk Misnomer casts a critical eye on fund selectors who become too attached to ‘star’ fund managers. Whatever your view, agree that the volume of investor discontent is rising.

7. Disruption Investors break and shorten the value chain themselves.

In many ways this model appears similar to institutionalisation (detailed above) but not controlled by existing distributors. Instead the disrupters are investors, technology innovators and government sponsored schemes. This broadens routes to market for investors and challenges market share in traditional segments. Examples of disruption include government sponsored investment schemes and auto-enrolment of employee earnings direct into pension schemes.

Conclusion What can we conclude from the above 8 models?

Not all ‘alignment’ has been good for investors and not all future alignment is good for practitioners.

What we are seeing in Europe is creating new fund management models and breaking old ones. Do key investor cultural differences exist in Asia or is it simply a matter of time before your clients align with other markets?

“

Not all ‘alignment’ has been good for investors and not all future alignment is good for practitioners”

Jonathan Beckett, Senior Manager, Fund Manager Assessment, Scottish Widows

8. Digitalisation The rise in technology and Robo-advice and its impact on the value chain is unavoidable.

We have entered the age of BIG DATA. Big Data collates and removes traditional information advantages and creates new data advantages.

Think: what part of the value chain cannot now be digitalised? The most obvious example of digitalization is Google ‘Robo-advice’, but we can also look at innovators like AdviceOS, Finametrica, NESA, Google Money, Nutmeg and Pure Group.

Digital does not respect geographic borders. In fund management barriers to entry are coming down with increased cross-border passporting.

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Jon Beckett, affectionately known as ‘JB’, is an active presenter and columnist on fund selection, fund governance and wider industry issues. A fund selector for over 15 years, JB is a UK spokesperson for the Association of Professional Fund Investors, author and senior reviewer for the Chartered Institute for Securities and Investments, think tank member, Non-Executive Director for smaller fund platforms and a gatekeeper for the Scottish Widows and Lloyds Banking Group £100bn+ unit linked platform, with Profits fund and wider investment proposition.

Jon Beckett will be presenting the European Selector Perspective at the Fund Distribution Summit on Monday 13th April.

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JUPITER GLOBAL

EMERGING MARKETS

UNCONSTRAINED A bottom-up approach to emerging markets helps us see past the headlines to the underlying investment opportunities.

Micro not macro At Jupiter, we consider emerging markets from a bottom up perspective. Rather than basing positioning on a top down macro view, we consider the investment case for Global Emerging Markets simply in terms of the number of mispriced company-specific opportunities we can identify. As of today, we see a large number of stocks across the market-cap spectrum and across a range of sectors and markets that have excellent return potential, given a combination of robust mediumto-long-term growth prospects and reasonable valuations.

Some positive stock stories from across GEMs

Ross Teverson, Head of Strategy, Global Emerging Markets Ross Teverson will be participating in a panel discussion on the topic of active management at 11am on Thursday 16th April.

Russian nickel miner and exporter Norilsk Nickel’s US dollar costs have declined on the back of a weaker rouble at the same time as the cost curve for nickel producers in China has been rising.

Norilsk shares already yield around 10% (a level that would usually suggest earnings are not sustainable) yet improving cash flow generation should drive this figure even higher. As a result, we like the company, and have been adding to our holding.

In Indonesia, we recently added a new position in real estate developer Bumi Serpong Damai (BSD).

The company has a strong balance sheet that is

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net cash and the company already owns enough land to ensure a development pipeline of almost 20 years. We believe the stock looks significantly undervalued considering the positive medium and long-term change the company is experiencing.

Marketing sales are picking up and a combination of rising mortgage availability from an extremely low base, reasonable affordability and very positive demographics should continue to support this improvement. The company’s healthy outlook was reflected in its stock performance, which contributed to fund outperformance.

Chinese telecommunications name China Unicom is a name we added to the fund at the end of last year. We believe the business stands to benefit more than its competitors from the award of nationwide 4G licences in 2015 and is strongly positioned to capitalise on the huge potential in China for increased data usage, given the country’s high levels of smartphone penetration and the rapid growth in Chinese online services. While Unicom is not alone among operators upgrading to 4G, because of the network technology it uses, its upgrade is likely to be less capital-intensive than for its competitors.

We also expect Unicom shares to benefit more than competitors from an improving operating environment, given that margins are expanding from a lower base level than for competitors, which means earnings will grow faster.

Emerging market equities represent a broad and diverse opportunity set and this allows us to construct portfolios that are concentrated and yet offer diversified exposure in terms of what drives businesses. Moreover, by investing in emerging market equities, investors are able to get exposure to many of tomorrow’s global industry leaders. Over

the last two decades, companies like Samsung Electronics in South Korea and TSMC in Taiwan have grown from relatively small low value-added businesses into global leaders in their respective fields. Today, markets like China and India are now moving up the value chain, creating globally competitive corporations along the way.

• Jupiter Asset Management (‘Jupiter’) was established in 1985.

• We now have 424 employees, including 50 investment professionals.

• Jupiter is one of the UK’s most respected and successful fund management houses.

• Our investment expertise includes fixed interest, multi-asset and equities.

• Assets under management are US$49.7 billion.

• We have won over 100 awards over the last five years.

Source: Jupiter group, data as at 31.12.2014

This document is prepared for use by Professional Investors only (term as defined under the Securities and Futures Ordinance, Cap. 571 of the Laws of Hong Kong). Distribution to retail investors is strictly prohibited.

Important Information: This document is issued by Jupiter Asset Management (Hong Kong) Limited and has not been reviewed by the Securities and Futures Commission. You are advised to exercise caution. If you are in any doubt about any of the contents of this document, you should obtain independent professional advice. The value of investments and the income from them can fall as well as rise and may be affected by exchange rate variations, you may get back less than originally invested. Past performance is no guide to the future. This document is for information only and is not an offer to sell or an invitation to buy. In particular, it does not constitute an offer or solicitation in any jurisdiction where it is unlawful or where the person making the offer or solicitation is not qualified to do so or the recipient may not lawfully receive any such offer or solicitation. It is the responsibility of any person in possession of this document to inform themselves, and to observe, all applicable laws and regulations of relevant jurisdictions. The information and any opinions contained herein have been obtained from or are based on sources which are believed to be reliable, but the accuracy cannot be guaranteed. No responsibility can be accepted for any consequential loss from this information. Any stock examples are used for illustrative purposes only and should not be viewed as investment advice.

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A MESSAGE ABOUT

FUND MANAGEMENT

IN THE UK

The UK is a leading global financial services centre and the most internationally-focused financial marketplace in the world. It is no surprise then that more overseas financial institutions and investors choose to do business in, and with, the UK than any other country.

Fund Management in the UK The UK is the largest fund management centre in Europe and the second largest in the World.

1st

in Europe

2nd

T

he UK is a leading global financial services centre and the most internationally-focused financial marketplace in the world. It is no surprise then that more overseas financial institutions and investors choose to do business in, and with, the UK than any other country.

The UK is also one of the largest markets in the world for fund management, and remains Europe’s leading centre for fund management.

Worldwide

There are huge opportunities for further partnership between the UK and Asia.

UK Trade & Investment is the UK Government Department that provides fund managers with all the help they need to set up a presence in the UK.

Find out more about the UK as a destination of choice.

Email: enquiries@ukti-invest.com +44 (0)20 7333 5442 (from outside the UK) 0845 539 0419 (from inside the UK)

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The rise of the Renminbi (RMB) is going to be one of the most important developments in financial markets of the 21st Century, and the UK has firmly cemented its place as a leading global RMB hub.

London continues to develop as the global hub for RMB business outside of Asia, and the UK continues to support the internationalisation of RMB by the Chinese authorities.

We have already seen a number of high profile Asian fund managers set up here in the UK and

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expect more to follow suit in the near future.

The UK has excellent credentials as the largest fund management centre in Europe and second largest in the world. Assets under management rose to a record £6.2 trillion at the end of 2013.

Of the total assets under management, some £2.2 trillion are now managed on behalf of foreign clients, making the UK the leading global centre by this measure.

As an investment management hub, the UK is an attractive location, both for management and domicile. Of the top five locations in terms of fund domicile in Europe, the UK saw the biggest increase in assets in 2013.

So the UK has a strong offer across domicile, asset management and distribution, as well as target investment allocation. The UK is the one-stop shop for Asian firms, and investment management firms from any jurisdiction, that want to enter the European markets.

If you are thinking of the UK as a place in which, or from which, to do business, help is available to make the process of setting up easier.

UK Trade & Investment (UKTI) is the UK national government department that offers free support and independent advice to overseas companies looking to invest or locate in the UK. Working with colleagues across UKTI’s overseas network, the UK Financial Services Organisation offers a One Stop Shop concierge service for fund managers to set up in the UK, bringing together access to all of the service providers required to establish a presence here in the UK, from accountants and legal advisers to recruitment firms and premises providers, the regulator and government, to provide a comprehensive package of assistance.

The UK has an unrivalled concentration of capital and capabilities, as well as a regulatory system that is effective, fair and principled. We are proud that we are one of the most open economies in the world.

Businesses from all over the globe can come here and invest, knowing that they will be free to pursue their interests in a stable and supportive environment.

The UK already has a strong offer. It has a transparent legal system and a highly skilled and educated workforce, and is one of the most connected places in the world, where you can do business in Asia in the morning and the Americas in the afternoon.

Financial business in the UK is overseen by a well-respected securities market regulator – the Financial Conduct Authority – so investors can have confidence in the strength and impartiality of our regulatory system.

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Sue Langley, CEO, UKTI Financial Services Organisation To find out more about investing or locating your business in the UK, visit UKTI at stand 14 in the exhibit area.

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30

facts & figures

#ffasia15 Each year, we ask FundForum attendees for their opinion on the state of the industry. Below are the responses we collected at FundForum Asia 2014.

Follow @FundForum on Twitter to find out how these predictions and attitudes have altered over the past year, and what FundForum delegates think about the industry for 2015 and beyond.

These figures draw on the results of the popular polling sessions from FundForum Asia 2014.

2015

sponsors We would like to thank the following industry sponsors for their support of FundForum Asia 2015.

For more information about our sponsors, download MyFundForum to your phone or tablet at http://is.gd/FFAsia15 or view the FundForum Asia 2015 website at www.fundforumasia.com/page/sponsorship-exhibiting

Principal Sponsor

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