Invesco to strengthen Chinese ties

With a growing footprint across Asia Pacific markets, gained through fund inflows and acquisitions, Hong Kong head-quartered Invesco aims at accelerating its push into the region, in which it started to invest almost five decades ago.

The American firm currently sources just $26bn out of its total $423bn in assets under management from Asia but it has committed increasing resources in the past few years to China in particular.

“From a strategic perspective, China has always been a key market for Invesco, and it will be the hugest in terms of opportunity set, because of its size and growth potential,” states Desmond Ng, chief operating officer and head of distribution in Asia ex Japan at the firm.

Invesco’s long-term story with the Chinese market started more than a decade ago, when the firm launched its first Chinese offshore equity fund. In 2003, Invesco was the first US-based fund management company to be approved for operating a joint venture in China, where it linked up with Great Wall Securities. Several years later it increased its ownership to the maximum limit of 49 per cent allowed to foreign partners in joint ventures.

At the end of 2008, Invesco strengthened the relationship with Great Wall Securities’ parent company China Huaneng Group, the largest power producer in China. Through the acquisition of private equity group WL Ross, the resulting firm, Invesco WL Ross, was able to leverage Huaneng’s market leading position in order to tap into private equity investments in power generation in the country.

In addition to these collaborative distribution ventures, Mr Ng has high hopes for the mutual funds market. He believes the domestic fund market, on both the retail and institutional side, has a bright future riding on strong fundamentals. But it is the QDII (Qualified Domestic Institutional Investor) schemes, giving Chinese investors to access to foreign securities markets through commercial banks in China, which offer the most exciting development perspectives.

Indeed the global downturn, which led to sharp declines in many overseas stock markets, dramatically diminished the value of financial products under the QDII schemes and consequently lost its initial appeal with Chinese investors.

“The financial crisis affected the momentum of QDII business but with the fast-paced growth of the Chinese domestic and Asian markets, investors really need to look for ways to diversify risk, and the very easy way to do that is to invest in international asset classes. One very strong reason behind our activity in China is to pave the way for QDII opportunities,” he says.

In Taiwan, the continued changes and advancements of regulations in favour of offshore funds registration has fuelled the market’s growth, which has benefited global fund managers like Invesco.

Recent relaxation in regulations regarding mutual funds investing in Chinese securities drove a new impetus of registration of Chinese funds. “Invesco was the first fund house to register a Chinese equity fund in Taiwan, and Chinese equity products last year had a big year in the country,” boasts Mr Ng. “Investors in Taiwan are increasingly looking at diversification and at new ideas, and, ultimately, at leveraging the offshore fund range.”

While in Taiwan and Hong Kong the main distribution channels are mainly banks, both retail and private, insurance companies and financial consultants, in Singapore, Invesco offers selected products through a restricted registration route, as it mainly works with a number of private banks

“In Hong Kong, the retail investor basis is huge, which offers great opportunity for us. Using intermediaries allows you to have a pretty efficient way of reaching the end client.”

Obtaining a good mixture of distributors, both global and local, is the key target which Invesco pursues. “The advantage of having global relationships with big banks is that you would already have an existing platform. The conversation is easy because they know the product and business very well, and opening a new market or a new distribution channel is just a continuation of the relationship. With local banks you would take more time, but I do see values working in with both,” says Mr Ng.

In places like Hong Kong, where products are offered through retail platforms, and are offshore products, a global fund manager can rightly leverage on its range of Ucits III funds domiciled in Luxembourg or Ireland, which have enjoyed great success lately in Asia. “Our preference of course would be in utilising global product platforms, because that can assure efficiency and economies of scale.”

Investment appetite coming back

In Asia, there is still a stronger bias towards regional asset classes, such as Asian equity investments, says Mr Ng. But in markets like Hong Kong and Taiwan there is also strong interest in other asset classes, such as global fixed income, emerging market equity or fixed incomes, or some of the themed products. Country products are also popular, he says, highlighting the success of Invesco’s China fund.

The financial crisis has also increased interest towards more conservative strategies. “Recently we are seeing more interest into balanced strategies because they allow investors to enjoy upside potential in Asia, but in a less volatile manner.”

Last year was good in terms of flows compared to 2008, but improvement has been quite gradual, says Mr Ng. “We are not completely out of the woods. Investors need to take their time to lick their wounds; as markets return to normal, confidence will slowly come back, but I don’t think it is totally back yet.”

The focus today is on “back to basics” in product design, on investor education and in making sure to help investors on how best to reassess their portfolio and how to make the right choice, says Mr Ng. “Product development and product management has always been an important strategy priority for Invesco, and the goal is not to launch new funds because they are the flavour of the month. We want to ensure that whatever we produce is an enduring investment solution.”

That also means capitalising on opportunities which Invesco identified in the infrastructure theme, launching the Asian infrastructure fund a few years ago, and in 2008 the Asian Consumer Demand Fund, which is focusing on the regional domestic consumption story.

In the past it was certainly the case that the majority of new inflows stemmed from new products, says Mr Ng. “In Asia in particular, when you have a new fund, the IPO mentality is certainly there. But I think increasingly investors are looking towards asset allocation and at products that generate good risk-adjusted returns, as compared to a product that has just a good theme.”

Sub-advisory on the rise

While banks and distribution channels mainly purchase products that are already on the fund houses’ shelves and make plain vanilla distribution agreements, in some markets there has been increasing activity on asset management delegation or sub-advisory activity, says Mr Ng. “Although the sub-advisory business is not mature yet, over the past two to three years, we have seen a pretty good momentum building up and we are looking at further enhancing it.”

In markets like Korea and India, Invesco has already established relationships with selective local asset management companies. “These local firms have historically been quite strong in their local asset classes and they are actively looking at ways to enhance their firms’ capabilities. One of the capabilities that we offer where we have had quite a strong success is in Asian infrastructure,” he adds.

Sub-advisory is a segment which provides another dimension in terms of the whole distribution “market reach” approach, believes Mr Ng. “Working with some selective asset management firms allows us to get the reach quite cost effectively. In places like Korea where we do not have a local presence, sub-advisory and institutional opportunities will be one step we would focus our effort.”

Having a good range of capabilities and the necessary infrastructure to be able to customise solutions is important, says Mr Ng, as sub-advisory often leads to very tailor-made solutions. “For a fund management company having adequate institutional experience would help in terms of formulating the solution and working with the client,” he adds, explaining that Invesco’s global total assets are equally split between the institutional and retail business.

“Sometime you need to tailor a product due to regulatory constraints, sometimes the client might have a very specific need, or very specific requirements on certain product design; so there needs to be a certain degree of flexibility.”

Desmond Ng, Invesco