THE TRANSFORMATION AGE: HOW ASIA’S INVESTMENT INDUSTRY IS ADAPTING FOR A DIGITAL FUTURE ______

Blog / 06 Jan 2022

Leo Chen, Managing Director - Head of Asia

The pace of change in the investment industry accelerated yet again in 2021. Digitalisation continues to dominate the discussion, but while 2020 was a story of resilience and transformation, the second year of the pandemic has become crowded with questions; of risk and uncertainty, setting a course for the digital future, embracing ESG, harnessing data, and evolving into a new world of emerging asset classes, virtual institutions, and low fees.

The questions go on, but digitalisation is the central theme that runs through them all. In 2021, more entities in Asia became digitally engaged, and they are doing it better than before. There are still critical operational and existential challenges to overcome, and the task of navigating this rapidly unfolding future was the subject of our recent virtual Connect Forum.

We explored the key issues raised by digitisation for the industry in Asia moving into 2022 and beyond.

Asia is a diverse region, made up of 48 countries, each with their own economy, regulations, operational processes, and at different stages of maturity in the investment world. As such, servicing and engaging with such a broad range of people is a major challenge.

To solve that conundrum, the industry must adapt quickly or risk losing customers to disruptive new entrants.

The drive for inclusivity

While the growth of family offices, private banking and the high-net-worth market tend to attract attention, inclusivity has also become a major focus. The goal of engaging clients who don’t have millions to invest is intrinsically linked to the development of automation and digitisation, and Asia is the world’s leading growth market in this area.

In the cause of giving lower-AUM customers access to different asset classes and helping them become more financially secure, the industry is becoming more operationally efficient, which will ultimately mean that digital investment becomes the norm, enabling seamless client interactions without manual intervention.

Virtual banks and robo-advisors are already pushing ahead, lowering the cost of banking and investment. Traditional stakeholders are rapidly following suit, looking at methods such as tokenisation, automated settlements, and real-time dashboards of information.

In this respect, China is blazing the trail, according to Steffanie Yuen, Managing Director at Value Partners.

“In terms of digital distribution, China is definitely ahead of the curve, not just in Asia, but probably globally,” Yuen said. “Some industry experts estimate that by the end of 2030, China will probably become the second-largest mutual fund market in the world. With its huge growth potential, it’s an exciting market that everyone would like to tap into. Given the prevalence of internet and smartphone penetration, around 90% of mutual fund retail investors in China already invest via online, so online distribution will be very important.”

Client-centric models

Part of the reason for success for China’s online platforms, are attempts to adopt a “different mindset” in serving customers and being focused on client centric instead of product centric, Yuen told the Forum. During the pandemic lockdowns, as clients were confined at homes, platforms in China ran massive online investor-education programmes collaborating with asset managers via livestreaming. As a result, we saw a jump in client onboarding and activity on these platforms even with clients who traditionally preferred to be served offline, Yuen said.

Another key factor which propelled the success of online platforms in China is the use of data analytics with the aim to better serve clients.  “Data is always there, but to make use of it you have to leverage technology…to have a clearer sense of the demographic of your clients and their product preferences,” she said. “That’s important for product development as well as customer journey personalization.”

This model of online distribution is beginning to spread around Asia. In India, Paytm Money became the largest online investing platform within two years of its launch. In Malaysia, TNG gathered 1 million users within two months and is expanding to offer other mutual funds. Thailand’s True Money launched a fund distribution platform offering more than 600 funds to their e-wallet customers. Even in Hong Kong, where the landscape is still dominated by banks, a 2021 survey found that 82% of retail investors would choose to invest online.

“I think that [in future] the distribution landscape in Asia will probably look more like China than the more mature markets,” Yuen said. “Some of these markets have similar characteristics to the Chinese market. They have the luxury of leapfrogging mature markets, which still have to bear with existing infrastructure.”

Digital strategising

Everyone in the industry is now formulating their digital strategy, and this is prompting some deep questions: How will technology transform the Asian funds management industry, and how will traditional stakeholders adapt? What steps should the industry take to deliver innovation?

Stephanie Leung, Director and Head of StashAway HK and Group Deputy CIO, identified three main areas of focus for industry disruption: product innovation, service innovation, and using technology to reduce fees.

In the area of products, the dominant trends in Asia are passive investment, the rise of thematics, and systematic (or algorithmic) investing. These trends are intrinsically more data-driven, lower cost, and ultimately therefore more accessible to a wider investing base, Leung said. This will help draw in clients at a time when many mutual funds are worrying about future sales.

“In services, increasingly customers are demanding anytime, anywhere, personalised, secure services, and the fund industry has also been moving in that direction; providing services on phones, providing a lot of transparency in portfolios,” Leung said. “And all these things are moving towards a better service for our customers.”

As these trends strengthen, the move away from standardised products and towards customisation will also accelerate, Yuen believes. Emerging technologies are putting the traditional mutual fund model under pressure and challenging traditional players think of strategies to adopt, she said.

“If we look further down the hole – with decentralisation and Web 3.0, powered by blockchain – clients will own their data and own their investment,” said Emmanuelle Pecenici, Co-chair of the Blockchain Committee for the FinTech Association of Hong Kong. “The asset manager will be part of that broader ecosystem, providing the products and the capabilities, but the industry will be less platform-oriented and more network-oriented, so everybody needs to make that mind-shift in order to evolve.”

Evolving the ecosystem

That evolution will inevitably involve the integration of ESG and crypto themes into mainstream portfolios, and here the panellists agreed that more development is needed before products become embedded in the Asian funds industry.

“Some of the basic building blocks such as trading platforms and custody tools are there, but for traditional managers to offer crypto there needs to be more of an ecosystem around the assets, as well as proper risk management tools and a clearer regulatory framework,” Yuen said. “For ESG, in Asia we really don’t have good ESG data for asset managers and a lot of it is unstructured. Increasingly, we need to prove that ESG products are credible and not marketing gimmicks, so we need to look at leveraging technologies to get closer to that goal.”

As the pace of disruption and innovation in the investment industry continues to accelerate, many traditional stakeholders appear to face a stark choice: adapt quickly or risk obsolescence. Leveraging technologies to grasp new opportunities is a complex process, however, companies have limited chances to get it right. In this fast-evolving environment, choosing the right technology partner may be the most important decision a firm can make to secure its future success.

Leo Chen, Managing Director - Head of Asia

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