A moment of great change: the Asian fund industry’s race for the future______

Justin Christopher, Head of Asia

For Asia’s funds industry, the immediate headlines are not good. Rising rates, spiralling inflation, slowing growth and massive net selling of fixed income funds by Asian investors, according to Calastone Global Fund Flow Index.

Looking beyond short-term difficulties, however, regional funds are at a moment of great change that presents the industry with an unprecedented mix of challenge and opportunity.

First, the challenge. Shrinking margins, fee compression, more engaged and active customers, new asset classes, digitalisation, and expectations of better service; the industry is facing a series of interlocking trends [that] demand a vigorous and coordinated response to retain competitive advantage.

Within Asia, a vast generational wealth transfer and the rapid emergence of an ever-growing consumer class has forced fund managers to rethink where future opportunities lie.

And the prize is huge. Asia is forecast to account for about half of the world’s consumption growth in the next decade, according to a 2022 McKinsey report[1]. By 2030, 70 percent of the region’s population may be part of the “consuming class”, up from just 15 percent at the turn of the millennium. For the funds industry, the most important market will not be the already-rich but those who are just starting to accumulate.

That represents a growth opportunity estimated at US$10 trillion – but only for fund managers who are ready to embrace change.

Alongside its inherent challenges, change spells opportunity for fund managers who can grasp an ambitious agenda, according to our recent paper “The Future of Fund Management”.

To fully grasp the opportunity, fund managers will need to come out ahead in three key races.

The Race for the Customer

Attitudes to investment are changing, and competition is becoming both stronger and broader. Traditional fund managers in Asia are facing challenges from non-traditional companies like Gojek, Grab, and True that are offering seamless digital investment services to emerging consumers. This represents a new type of potential market for an industry accustomed to chasing the wealthy; tens of millions of low and middle-income people making small, regular investments.

How fund managers can overhaul distribution and customer experiences to secure relationships with these new customers – and their existing ones – will determine their success or failure in the coming decade and beyond.

Managers who stand still on distribution will quickly be left behind. According to one survey, 93 percent of Asia-Pacific fund managers lost customers to digital challengers in 2020, and that challenge is growing stronger[2]. To arrest this trend, managers need to meet the expectations of an evolving customer demographic, harness technologies to provide frictionless digital experiences, which in turn will improve efficiency in an industry increasingly defined by the ability to service customer needs at lower cost. Aligned with that is the rise of direct-to-customer (D2C) models in Asia, which are starting to erode the dominant position of other distribution channels and offer fund managers the opportunity to reshape their customer relationships.

Accordingly, professional financial advice is an increasingly important brand differentiator. Once confined to wealthier customers, innovative financial companies in Asia are opening a growing niche in low-cost advisory services. Despite increasing financial engagement and awareness among millennials, surveys show that the demand for professional advice is still high.

This trend is being helped along by the region’s ongoing leadership in FinTech adoption. Asia leads the world in digital and mobile wallet payments, and also benefits from a consumer environment in which, according to a Euromonitor survey, people are comparatively more willing to share personal data.

According to the McKinsey report[3], the number of robo-advisory users in Asia is projected to grow to 400 million by 2024, from 111 million in 2020, while another survey found that more than three-quarters of asset managers are considering expanding their offerings into areas such as advice.

The Race for Digitalisation

The majority of Asia’s fund managers know by now that their future opportunities are inextricably linked with the success of their digital strategies.

This goes far beyond the provision of apps for DIY investing or robo-advisories that can guide money allocations based on questionnaires and algorithms, and encompasses the entire fund-management value chain from front- to back-office.

The payoff for companies who do this successfully is potentially enormous. One study in North America found that fund managers classed as “digital leaders” were able to onboard institutional clients twice as quickly and at one-quarter of the cost, post 70% higher profit margins, and 10-year AUM growth rate double the industry average.

But while those early movers have gained an advantage, for much of the industry the bulk of the digital transformation journey still lies ahead, and much of that journey will be consumed by the challenge of data management.

Fund managers will increasingly find that success hinges on their ability to manage, analyse and utilise data. The reverse of this equation is that managers who fail to streamline and modernise their data systems face a future in which they carry all the costs of digital transformation while reaping too few of the dividends.

For some companies, that presents a challenge. The asset management ecosystem across Asia is highly diverse and fragmented. Outdated technologies and legacy systems remain prevalent and reliance on manual processes persists, even in more developed markets such as Singapore. Some managers are hesitant to jump into wholesale digitalisation, fearing that they have only one chance to get it right (and one chance to make an expensive mistake), while others in countries with low labour costs see digitalisation as an unnecessary outlay.   

The Race for Differentiation

For fund managers who have moved early, developed their distribution strategies and rolled out their digitalisation plans, the race has not ended.

Asia’s investment landscape and the mindset of investors is undergoing enormous change, and the appetite for new asset classes, thematic, and basket investing is beginning to eclipse traditional stock-and-bond portfolio recipes.

Vanilla funds are no longer flavour of the month. The new breed of young Asian investor wants variety and personalisation: crypto, AI, blockchain, ESG, battery tech. Even traditional investors are increasingly demanding ESG fund labelling, adding a further degree of complexity for asset managers as regional governments embark on the difficult task of defining the sustainable investment taxonomies to which they must eventually comply.

Calastone’s fund flow data shows that investor interest in Asian ESG funds is exploding. Net inflows into Asia ex-China and Japan sustainable funds reached US$911 million in the first quarter of 2022. China ESG funds alone drew in a net US$11.6 billion in 2021, reaching a record asset value of US$46.7 billion and overtaking the United States as the world’s second-largest climate investment market in the process.

Fund managers must respond to the rising demand for these categories, and provide not just options for accessing them but ensuring they can associate their brands with areas of the market that dominate investor thinking.

The competition for Asia’s investors is going to define the future of the industry. For fund managers, the challenge lies not just in winning three separate races, but running them all at the same time.

[1] McKinsey & Company, 2022, Beyond income: Redrawing Asia’s consumer map

[2] KPMG, 2021, digital wealth management in Asia Pacific

[3] McKinsey & Company, 2021, Future of Asia: The future of financial services

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