Fund houses seek new channels for sales

An asset manager’s ability to diversify its distribution channels becomes even more critical in difficult market conditions, believes Terry Pan, head of JF Asset Management’s Hong Kong retail business. “If we were to become too focussed on a particular type of distributor, we would be managing a very risky business, and the volatility of our assets and revenues would be very high,” he explains. Like in most Asian markets, retail investors among Hong Kong’s seven million-strong population tend to buy their products from bank branches. Those large players that have been in the wealth management arena for a long time dominate JF Asset Management’s book of business in HK, explains Mr Pan; but the fund house, which is part of JP Morgan Asset management and manages $80bn in equity products in Asia, tries to diversify its channels of access to retail investors through smaller banks, insurance companies, independent financial advisers and brokerage firms. However, the firm’s differentiating factor is its direct distribution business, which has been running for the past 20 years in Hong Kong, as well as in Taiwan. “In such difficult market conditions, the main focus of an asset manager is on its ability to maintain assets overall, rather than growing them,” says Mr Pan. “And our direct business is possibly slowing down more slowly than the intermediaries’ for a number of reasons. Firstly it is more diversified. Intermediaries buy just equities from us, and the equities drop has been more severe. But in our direct business, we manage people’s portfolio which includes fixed income, cash and equity.” Through its 20-staff branch office in Hong Kong, the firm sells only in-house products. “Investors normally open an account and expect investment advice,” says Mr Pan, “although of course we can also do execution only.” Direct, unfiltered communication with investors is another important factor that contributes to asset stability. Apart from the pure financial aspect, says Mr Pan, a direct business is a great research and development area. “We test ideas with some of our trusted clients; doing research via the informal focus group with our end investors is a lot simpler,” he says. At the same time, running a direct business requires a combination of tact and good business sense. “We never price compete with our distributors, as we would lose their faith. And it would be silly to compete with a bank, anyway,” he says, explaining that one branch with 20 staff cannot possibly take the business away from bank distributors which offer a more complete package in a one-stop shop. The practice followed by many international private banks of buying products from some global platforms, which may be in Switzerland or other European countries, makes the understanding of what products are sold locally quite challenging, says Mr Pan, voicing a common remark amongst distribution heads. “Often there is not a separate book ….. for the Asian business. This makes our business a lot harder,” says Mr Pan. “If I knew what in general private banks have been buying and what they have been selling and what they are holding, what the book of business looks like for their end clients, for us, as a house, to give our earnest advice would be a lot easier.” Increased integration The current crisis is going to intensify dialogue between distributors and fund managers. “This is going to become much more integrated,” says Lieven Debruyne, CEO at Schroders Hong Kong and regional head of retail business Asia. “Now investors will want more advice and better understanding on their investments and will demand more clarity of the product itself and products will become more simplified. The co-operation between the fund management houses and distributors to provide information is going to be even more crucial,” he says. The financial crisis is also having an important impact on the traditional appetite for the hot investment ideas. “Asian investors traditionally like the idea of a new product. New, in Asia, is very much identifiable with something good and generating good performance,” he says. “Asia has been a very easy place to launch new products, because if you have the right product and people like the ideas, the pick up is going to be extremely strong.” When Schroders has launched products in various markets, it was stated clearly that it was a new product in the advertising material. “We know it does attract new investors when you put a big stick with “new” on it.” But the current market turmoil will bring changes. “The attraction to new products will stay, but investors buying the latest investment ideas will need to think carefully and properly about their investment portfolios and what they are actually buying, what the risks are and how that product ties with other investments that they hold,” explains Mr Debruyne. Risk appetite has gone from an all time high 18 months ago, before markets start falling, to the current all time low. “People are not willing to take any risk anymore and want to have cash or the safest of assets. The sales of active mutual funds have come to “a virtual standstill” and the huge losses investors suffered due to the collapse of Lehman Brothers credit-linked notes have caused the structured product business to slow down dramatically too, says Mr Debruyne. In the immediate future, people will look at very low-risk investment products, such as fixed income or structured funds, which offer some protection with an income element and pay out; credit will be quite interesting at the beginning of 2009, he says. “A little demand for equities will come back but I think it will be very much for actively managed equity products, where people understand that behind the manager there is a solid company which does fundamental research, more than any passive or quantitative products.” In booming markets, people could invest in any strategy and make money. “People are now going to be much more selective and will shy away from black boxes.” Another traditional aspect of the Asian fund market that the crisis could dent is the high turnover of products in clients’ portfolios. Longevity in investment products in Asia tends to be lower than in other parts of the world and that of course affects a fund manager. “When you have more in- and out-flows, managing the cash balance becomes more difficult and unless you do it very well, it can affect performance, particularly when the flows get very large,” says Mr Debruyne. It also increases the servicing requirements, because more products come in and go out of favour, which increases the size of the product range to service. This creates challenges for fund managers. “It is in our interest, but in the investors’ interest just as much, to see a mutual fund as an investment and not as like trading a stock,” he says. “We are trying to convey this message by working with distributors and the regulators. We are trying to promote regular saving plans with our distributors, but we have quite a long way to go in Asia.” It is important to build a mix between core investment products and the more thematic funds. “We are trying to get a good percentage of assets in the core funds, whether through regular saving plans or through general accounts. Distributors have a very large role to play in this process, and you would expect their interest to increase because of these difficult markets,” he says. “If distributors had a larger part of their book of business in stickier assets, the volatility would be reduced and clearly that is in their interest. But it is not that easy to achieve.” Insurance companies on the rise The increasing role that insurance companies will play in the wealth management arena could eventually redesign the Asian fund distribution market. “Insurance companies have large ambitions in wealth management and that’s only going to become more dominant, they will become a bigger and bigger channel for investment products next to pure insurance products,” predicts Mr Debruyne. However there is a lot of educational work to be done. Only a small percentage of agents are currently licensed to sell investment products and they are currently years behind the bank-based relationship managers, who are old hands when it comes to shipping out products. One way of achieving this is for an insurance company to work in collaboration with asset managers, says Mr Debruyne. “We spend a lot of time working with insurance companies, because we believe it will create brand awareness and product awareness with the agents, and they will feel more comfortable to talk about our products.” In this context, one of the most developed markets is Taiwan, where over the past few years the number of investment funds sold through insurance companies has increased quickly and it is now a very significant part of the total market, much more so than any other market in Asia. In those unit-linked products, investment funds tend to be slightly more core and longer term, although there is an element of thematic funds as well, adds Mr Debruyne. “Distributing funds through insurance companies is one of the big pluses, because longevity of insurance wrappers is very long. These are all 10-year long contracts and assets are very sticky.” In the short-term, insurance companies will benefit from the poor reputation that the banks have suffered in the Lehman Brothers minibonds saga, reinforces Rex Aeyung, chief executive, Asia, at Principal International. Before the collapse of Lehman Brothers in September 2008, banks would win hands down over IFAs and insurance agents, says Mr Aeyung. “Banks in Hong Kong and Singapore will have to do a lot of work to regain the positive reputation they used to have in fund distribution,” he says. “For the whole of 2009 they will have to really pull up their socks and rebuild customers’ confidence.” Finding equilibrium in joint ventures The current crisis can turn out to be also a significant test for the many joint ventures between foreign companies and local banks in Asia. While domestic banks provide local market knowledge and access to an extensive distribution network, foreign firms tend to bring product design and innovation, improved risk management techniques, new research tools and in general extensive international experience, says Mr Aeyung. Principal International has two joint ventures with CIMB bank in Malaysia, for both domestic-oriented conventional products and for international Sharia compliant products, and over three years ago they entered China through the joint venture with China Construction Bank (CCB), one of the Chinese ‘Big Four’ banks. In a delicately-played game, risks may arise when the foreign partner pushes for a change “a little bit too fast”. “This is what we learnt,” says Mr Aeyung. “In a big market like China, there are certain Chinese cultural traditions that you need to respect and you can’t push too fast. That’s where the conflict could arise.” For example one of the most common discussion topics is the percentage of cash the manager holds in the fund, says Mr Aeyung. Given that the Chinese market has lost 65 per cent last year, a local firm would want to hold as much cash as possible, he says. “The approach of a foreign firm is different; we always try to be fully invested, within certain limits. We think all you have to do is invest in more defensive stocks, rather than all cash. Investors can hold cash themselves, why otherwise would they want to buy from us?” But having a joint venture does not mean the branches will sell the product right away. “We still have to compete, just like any other fund house for shelf time,” says Mr Aeyung. A unique market The peculiar role that the custodian bank has in China sets this market apart from the rest of Asia. Because of the high custodian fees, which are around 25bp for an equity fund and 20bp for a bond fund, the custodian of a fund will also be its major distributor, explains Denis Lefranc, chief executive officer at Société Générale Asset Management in Asia Pacific. Having a large bank with a wide distribution network as a custodian will help raise assets, as that will mean more custodian fees for the bank. Fortune SGAM, the joint-venture between Société Générale Asset Management and Fortune Trust, the investment trust company subsidiary of the steelmaker Baosteel group, is to launch its first product with China Industrial and Commercial Bank of China (ICBC) in 2009, reveals Mr Lefranc. The jv, which was set up six years ago under Mr Lefranc’s leadership, already distributes 70 per cent of its total $8bn assets through two major banks, China Construction Bank (CCB), mainly, and Bank of China (BoC). “Our strategy was to select a partner which gave us the possibility to work with any of the big banks,” says Mr Lefranc. “If the jv is an independent asset manager, other banks do not see you as a competitor and are willing to work with you.” On the contrary, a typical jv between a foreign fund management and a Chinese bank generally sources over ninety per cent of its sales from its domestic banking partner, says Mr Lefranc. But launching a product with a bank is not a decision to take light-heartedly, especially in such a large market like China. “Each time you launch a product it is a big investment, a huge task. Every bank has its own products, its own tradition, its own way of working, so you need to understand that.” If you select a distributor and because of lack of understanding or study, you encounter a problem in terms of customer service for your first product, this can badly ruin your reputation, he explains. “China is so big and so are the branches, you really need to provide service coverage at each main branch level. If you are not there to explain the products to the guys on the ground, those who actually sell, and you don’t provide them with the right training, it’s not going to work.” Mr Lefranc has specific expectations of his marketing and sales team, which is spread between Beijing, Shenzen and Shanghai: “I don’t like to see them in the office. Their job, even outside the marketing period, is to maintain existing assets, to inform distributors, to give them the right information and get their feedback. That is also why we make sure to hire local people, with local culture and local language.” In China, like in India, where SGAM has a joint venture with State Bank of India – the main distributor of its $6bn total assets in the Indian sub-continent – the first step of the strategy is to bring product innovation and develop good domestic products. The second phase is the cross-fertilisation phase, where the appropriate international products are offered to domestic investors and local products are provided to the firm’s international customer basis. In China, the first QDII product that Fortune SGAM launched at the and of 2007 was mainly invested in the Hong Kong market, in Chinese companies listed abroad– “because when you launch the first international product in China you need to be make sure that the end customer understands the product” - but for 2009 the firm is looking to offer a range of international products capitalising on the firm’s expertise in beta and guaranteed products, mainly having equity as underlying, says Mr Lefranc. When the market stabilises, retail investors will demand performance and safety. “It is probably going to be difficult to sell pure alpha equity product. We want to offer transparent products, which are easy to understand.”

Terry Pan, JF Asset Management