The Spence Johnson Blog

By Yoon Ng, 31 May 2017Market Intelligence | Investment Products

Local wealth managers make their mark in India’s HNW space

India’s economy has stabilised after the shock demonetization in November last year. Its huge economy and favourable demographics continue to capture the interest of foreign asset managers, though not quite as intensely as China does at present. Traditionally, gold and real estate have dominated the investment preferences of India’s wealthy. But with the rise in equity markets over the last few years, there has been a tangible shift in preferences with investors eyeing financial products as well.

This shift may have been given a boost by the cash ban. At that time of the demonetisation, some fund managers in India were optimistic that new capital inflows would be generated. This has been affirmed in India’s mutual fund space, helped by declining interest rates that prompt investors to look beyond bank deposits for yield, as well as increased investments in systematic investment plans (SIPs). The assets under management (AUM) of the mutual fund industry grew from Rs16.46 trillion (US$254.1 billion) at the end of 2016 to Rs18.29 trillion by the end of March this year, according to data from the Association of Mutual Funds in India (AMFI). It is a signal that India’s economy is in good health in the wake of the impact of the demonetisation.

However, AMFI’s data showed that the concentration of assets among the biggest mutual fund players has intensified. The top 10 asset managers, which represent about a quarter of all mutual fund companies in the industry, contributed 88% of AUM growth over the period. The AUM share of the top 10 players rose to 80.6% by the end of March this year, from 78.4% the year earlier.   

The dominance of the largest players has historically contributed to making it very difficult for foreign asset managers to break into the market. We have seen in many markets in Asia that whenever a few players dominate a mutual fund market, distribution costs for newcomers tend to be much higher. Meanwhile, if foreign asset managers are thinking of forging partnerships with the leading players, they are probably already too late. Most of the local giants have already hooked up with big foreign firms, as reflected in names like ICICI Prudential Mutual Fund, Reliance Nippon Mutual Fund and Birla Sun Life Mutual Fund.  


Against this backdrop, it is not too surprising that several foreign asset managers have left the country in recent years due to factors that include the high costs of doing business in India as well as regulations on foreign exchange and investing overseas. The latest to exit was JP Morgan Asset Management last August. It followed the departures in recent years of the likes of Goldman Sachs, Morgan Stanley and Fidelity International. 

 There may however be one area of interest for asset managers in India -- the high-net worth (HNW) space. A lack of penetration in this space has seen the number of start-ups competing for investors’ assets increase sharply in recent years. In fact, the fastest AUM growth is coming from relatively new local players like IIFL Private Wealth Management, Centrum Wealth Management and Sanctum Wealth Management.


Local wealth managers have gained in prominence in recent months on the back of some corporate activity which, in turn, lend some insights to their strategy for this space. For instance, Sanctum, which was created via the acquisition of RBS’ India private banking business, opened its fifth office in Kolkata in May. This adds to its offices in Mumbai, Bangalore, Delhi and Chennai. Branch expansion is a strategy that can be costly, but the underpenetration of wealth management services across India makes it a risk worth taking. Even the big local banks are not spared as Religare, one of India’s diversified financial services holding companies, sold its wealth management business to newcomer, Anand Rathi Wealth Management in February last year.

The emergence of local wealth managers in India could lead to at least a couple of positive outcomes. First, there could be outsourcing opportunities, albeit small, for foreign asset managers as local wealth managers may lack investment expertise in certain areas that their clients are demanding. Second, local wealth managers might have to start thinking of partnerships with foreign asset managers in order to go up to the next level. This is particularly relevant as they expand beyond local shores to tap on non-resident Indian’s (NRI’s) wealth. The wealth management space in India will thus be at least worth watching for such opportunities going forward.

Spence Johnson is in the midst of researching more deeply into the wealth management space in India, the results of which we hope to highlight in our inaugural wealth management report for the Asia Pacific region later in the year. 

By Yoon Ng, 8 May 2017Market Intelligence | Investment Products

China’s regulation unification could benefit multi-asset fund managers

Regulatory risks in China are always high in the thoughts of foreign asset managers that want to enter the country to conduct business. In recent years, Chinese financial sector regulators have tended to adopt a wait-and-see stance on new products and innovations in the asset management space. They typically only make their moves to implement regulatory restrictions when they identify activities that could have a destabilising effect on markets.

This year, though, the Chinese regulators have become more proactive in overseeing the asset management industry. In February, local media reported that a People’s Bank of China (PBOC)-led internal consulting paper titled “Guiding Opinions on Asset Management Business Regulation of Financial Institutions” (Opinions) had been reviewed and received comments from the China Banking Regulatory Commission (CBRC), China Securities Regulatory Commission (CSRC) and China Insurance Regulatory Commission (CIRC), and other government agencies.

A high-ranking official from CIRC was quoted as saying that the PBOC, CBRC, CSRC and CIRC had been “intensely engaged” in a unified design for the overall regulatory frame of asset management businesses, and pointed out that due to the commonality of asset management businesses, such unified regulatory rules would be essential. The primary driver of this initiative is to focus on preventing systemic risks, rather than radically restructuring the financial regulatory framework.

The trigger behind this proactive stance is the explosive growth of shadow-banking sectors including banks’ wealth management products. According to the PBOC, the value of Chinese banks’ off-balance-sheet wealth management products exceeded RMB26 trillion (US$3.8 trillion) by the end of 2016, up 30% year-on-year. CBRC’s newly-appointed chief, Guo Shuqing, was quoted by the media in March as warning against the opaque nature of many investment products. “Some financial products...are invested in each other, with no one really knowing the underlying assets or the final destination of fund flows,” he noted.

Beijing’s emphasis on curbing financial risk in mainland markets can be a genuine source of optimism for foreign asset managers keen to pursue business in China. There will be a demand for financial products that are transparent, and in which risk controls are part of the fabric. This is where foreign asset managers could reap some benefits. Stringent risk controls are nothing new to them. Foreign asset managers are transparent in their operations, while risk management is part of their DNA. One such product we’ve identified is multi-asset funds. As opposed to multi-asset funds offered by Chinese managers which tend to be more focused on stock picking and thematic in nature, foreign managers are able to leverage on their experience in using more robust asset allocation and risk management techniques.

However, there are now more options available to foreign asset managers than ever to make their moves into China. The wholly-owned foreign enterprise (WFOE) model has emerged as the most popular route for foreign managers to enter the market and potentially create local products for retail investors in due time. However, it is important to realise that even after receiving the license, further approvals by the Asset Management Association of China (AMAC) is necessary. So far, only Fidelity International has received the approval at the point of writing. As many foreign managers have since realised, getting a quota/license is the start of a long journey to winning assets in China.


In fact, foreign managers which have successfully accessed demand for multi-asset funds have done so by working with local managers or distributors. They include partnerships with local managers, such as Efunds with SSgA, China Asset Management with Boston-based quant manager, PanAgora; or distribution via local wealth platforms like Noah Holdings and Creditease. Another potential opportunity set which is relatively untapped at the moment by foreign managers is Enterprise Annuity. Dominated by insurance-backed EA managers, foreign managers could attempt to work with the largest players in this space such as Ping An, Taikang and China Life.

The multi-asset fund opportunity in China is huge, worth US$241 billion to be precise, and double digit growth rates are projected in the next five years. The potential for growth is massive but with a mere 6% addressable to foreign managers at present, it is wise to be realistic about the opportunity set and timeframe. As the Chinese saying goes, “A single tree does not make a forest, a single string does not make a tune.” Finding the right local partner could go a long way in locking in this pot of gold.


For a comprehensive analysis of the multi-asset fund space in Asia including China, look out for Spence Johnson’s upcoming report, “APAC Multi-Asset Funds: A trillion dollar opportunity”. 

By Yoon Ng, 25 January 2017Market Intelligence | Investment Products

APAC investors lay down efficiency rules

By Yoon Ng, Spence Johnson, APAC Director

With US$30.5 trillion in total assets and expected growth of 5.0% per annum, APAC institutional investors are movers and shakers in the investment world, both regionally but also increasingly on the global stage. The focus on yield grows more acute amidst the “lower for longer” outlook. Coupled with greater volatility on the horizon, both economically as well as politically, efficient use of resources is the rule of the game – be it in risk budget, fees or time utilisation.

From large sovereign wealth funds (SWF) in the region to pension funds in Southeast Asia, investment philosophies are slowly shifting from a focus on static asset allocation to one on risk budget. Investors are increasingly looking at returns on a risk-adjusted basis and are growing more receptive to absolute return, benchmark free strategies. The willingness to move up the risk curve is reflected in their investment decisions from core fixed income to alternatives on the fringe.

The dominance of fixed income (FI) strategies in APAC outsourced assets is evident from our proprietary data platform, Institutional Money in Motion (iMiM) APAC, where cumulative net flows into FI from 2013-H1 2016 outstrips that into equity, the second best-selling sector, on a 4:1 basis. If we look more closely at the investing trend within FI, we noticed institutional investors have crept up the credit risk spectrum as they pivot away from government bond towards riskier strategies like corporate/credit and emerging market. Investors are also willing to embrace more niche strategies in their hunt for yield as we see absolute return, unconstrained strategies gain momentum.

Likewise, interest in alternatives strategies show no sign of abating as investors seek illiquidity premiums in a yield-starved world. Our APAC iMiM data shows a resurgence of interest from SWFs in hedge funds and we see that reflected in mandates handed out by other institutions such as Korea’s National Pension Fund (NPF) and Korea Post Savings Bureau. Infrastructure debt and private equity are amongst the top three asset classes which APAC insurers have indicated their interest to invest in; and Chinese insurers have continued their relentless pursuit of direct real estate deals into 2017.  However the way investors choose to access alternatives differs. The approaches vary from direct access, setting up subsidiaries, investing in alternative firms to complete outsourcing to external managers.

The focus on efficiency gains has also led to multi-asset funds seeing interest from a plethora of investors, from official institutions in Singapore to DC pension funds in Australia. Some view it as an equity replacement tool and others as a way to completely outsource investment decisions. Net flows are still small at the moment relative to fixed income but we see steadily climbing inflows, with flexible unconstrained strategies most in favour. Further, interest in multi-asset is not restricted to small investors as Japan’s Government Pension Investment Fund (GPIF) announced its decision to award multi-asset mandates in 2014 followed by Taiwan’s state pension, Public Service Pension Fund in January 2017.

Lastly whilst investors are happy to pay for true alpha and illiquid access, we expect investors to keep a tighter lid on the investment fees to extract maximum value from third party managers. This is giving rise to smart beta investing, as investors seek cheaper ways to access factors such as low volatility, value and momentum to name a few. We have yet to arrive at a definitive sizing of the smart beta market in APAC but our research in EMEA suggests the European smart beta market is booming, with assets worth EUR224 billion as of end 2015 and an 23% annualised growth over the last two years. Smart beta strategies are still at an infancy stage in Asia with single factor strategies rather than multi-factor taking root. But with the overhang of a low yield outlook, we expect more institutions to follow the footsteps of Taiwan’s Bureau of Labour Fund (BLF) and Thailand’s Government Pension Fund (GPF) to increase allocation in this space.

Hunt for yield has become a central theme for investors as the global economy slows. The choices available to investors are either to accept a lower return, higher risks or revamp their investment approach by using their time, risk budget and fee resources more effectively. As the macro environment puts more demand on resource utilisation, expect the same scrutiny to translate to their demands on external managers too.