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State Street Research Finds Market and Regulatory Fragmentation Poses Major Challenge to Asset Management Industry and is Driving Outsourcing

Survey of Asset Management Industry in APAC Highlights Significant Challenges to Capitalising on Opportunities in the Region
Oct 9, 2013

Hong Kong – The top priority for fund managers is expansion into new markets in Asia Pacific, however, the industry is grappling with the region’s highly fragmented markets, according to a major new industry study conducted by State Street. The report, entitled “Navigating For Growth,” reveals that fragmented markets are creating complexity for regulatory compliance, product innovation and efficient scaling of operations.
State Street, in partnership with Longitude Research, surveyed 200 asset management industry executives across the Asia Pacific region to explore the key issues that will shape the industry’s evolution. The majority of participants were senior executives based in Singapore, Hong Kong, Japan, Australia and China. Forty-six percent of respondents work for domestic asset management companies based in the region, 36 percent for major international businesses headquartered in the region and 19 percent for international businesses from outside the region.
Forty-two percent of respondents said they are considering expanding into new markets with 28 percent of the total respondents saying this is their top priority. Often faced with low returns and a limited market size at home, asset managers are looking to developing economies and high savings rates in other Asian markets for growth. Deepening penetration of existing markets was the top priority for 24 percent of respondents.
Focus on Frontier Markets
The drive to expand into new markets was particularly strong among respondents in Japan, where more than half (52 percent) highlighted this priority. New market expansion was a priority for 28 percent of managers in Hong Kong, 23 percent in China and 23 percent in Australia.
Paul Khoury, Head of Asset Manager Sector Solutions in Asia Pacific for State Street Global Services, said that the growing Chinese market is one of a number of priorities for asset managers in the region. “Many companies in the survey that wish to operate in China are already doing so. Now asset managers are also looking to frontier markets with 54 percent of those preparing to enter a new market considering Malaysia, while 43 percent are considering expansion in Thailand.”
Companies that are targeting new markets are driven by both opportunity and economic necessity. Staying put is often not an option.”
Challenges of Fragmented Markets
Despite ambitious growth plans across much of the industry, the region’s fragmentation poses a substantial barrier – cited by 51 percent of total respondents as a serious or very serious challenge for their business. Among firms that operate in more than one country, the figure rose to 63 percent.
“The region is more fragmented than any other in the world in terms of size, geography, language, culture, regulation and tax harmonization,” said Damien Barry, Senior Vice President, Offshore Funds Services at State Street.
One big issue is regulation. Fifty-two percent of respondents said they need to make significant changes to systems and processes to meet the diverse reporting requirements of multiple jurisdictions. Even more striking is the finding that 38 percent of managers are concerned about their firm’s ability to assure compliance with fragmented and evolving regulation in these different jurisdictions. Fifty-one percent said they need to make substantial changes to develop strong risk management strategies tailored to each market.
Although several pan-regional initiatives are underway to improve regulatory integration, such as the Asian funds passporting initiative, the mutual recognition among ASEAN countries and between Hong Kong and China, the extent to which these will materialise as sustainable, scalable, efficient product opportunities, and the form they will take remains unclear. Where successful, these schemes could be hugely effective and present significant opportunities for asset management.
Scaling Operations Cost Effectively is a Critical Challenge
“With these pressures, and despite the hunger for growth, it is not surprising that 69 percent of respondents described scaling operations efficiently as a serious or very serious challenge in the region,” said Khoury. A further 71 percent of survey respondents thought that optimizing returns in a challenging global environment was a serious challenge.
When asked to name the areas where they need to make most significant operational changes, 56 percent of respondents cited ensuring that their control environment does not hinder business growth, 50 percent cited investing in systems that are flexible enough to accommodate future demands, and 39 percent cited understanding all sources of operational risk.
Khoury continued, “There are a number of strategies asset management companies should consider, such as deploying adaptable technology, careful acquisition of the right talent and taking a serious look at activities that could be consolidated at a regional level, and consider outsourcing non-core activities to external providers. But it is important to select the right provider with a strong regional presence that understands each individual local market and its regulatory requirements.”
Integrating Data is Key
Technology is key for asset managers to gain a consolidated picture of exposures globally as portfolios become increasingly complex. A growing interest in alternative investments to help drive returns and manage risk means that firms will need data platforms with multi-asset capabilities.
When asked in what areas they need to make most significant changes in relation to maximising value, 57 percent cited integrating and consolidating investment data from disparate sources, 49 percent cited preserving margins in face of downward fee pressure, and 39 percent cited managing complexities associated with investing in alternative asset classes.
Constraints on Product Development
To increase current market share and expand into new countries, asset managers need to create an attractive product mix for both institutional and retail investors, according to the survey, but compliance across multiple markets constrains innovation and puts pressure on management time. Sixty-four percent of respondents said they were highly concerned about regulatory constraints on their ability to develop innovative products and services, which will be critical to their expansion efforts. Thirty-six percent conceded that their businesses need to make significant changes to understand the regulatory implications of new products, and 49 percent were concerned about management time and focus being devoted to regulatory compliance, at the expense of other issues.
When developing new products, asset managers also have to develop a greater understanding of investor appetites and product preferences, with 47 percent of respondents saying that their businesses required significant changes to their approach to this aspect.
“Product innovation is a major challenge for asset managers in this region,” said Barry. “Critical success factors include having the right technology, a deep insight into local investor demand, and a clear view of regulatory impacts on new product development.
“Asset managers need to consider which products will drive value over the long term. While a focus on on-trend products is understandable, and may be an effective way of attracting assets in the short term, it may not necessarily be in the best long-term interests of investors. Ultimately, managers need to find a way to create long-term value within the parameters of what will sell.”
In addition, having the right technology in place to support product development is crucial and 52 percent of respondents said they needed to make significant changes in that area.
Khoury concluded, “Asia is as the heart of the economic transformation that is reshaping the world economy. The asset management industry has a huge opportunity to take advantage of this shift by pursuing growth opportunities created by the increasing investment in Asia and the region’s growing supply of domestic capital. However, the challenges will define the winners. Companies need to focus on generating long-term value for investors and thoroughly understand the markets that they are targeting. They need to chart a new roadmap to take them to the next stage of growth.”
For further information on the State Street survey, please click here.