Looking back on 2018
2018 was a tough year, marked by heightened global market volatility and geopolitical uncertainty. The global market sell-off in October resulted in S&P 500 falling by nearly 20% and MSCI Emerging Market Index down nearly 14% in 2018.
Amid this market volatility and bearish sentiment, many of the mutual funds suffered and underperformed their respective benchmarks. Investors are therefore looking increasingly for lower cost alternatives to the traditional actively managed mutual funds.
ETFs, for instance, offer lower management fees than other investment solutions and are gaining in popularity among investors in Asia. According to Bloomberg data, a total of 255 ETFs tracking Chinese equities saw a record US$7.34 billion of net inflows in October 2018. This is nearly 20% more than the previous high of US$6.14 billion of inflows during the 2015 stock rout. This trend is happening across Asia-Pacific; the trading value of Australia’s ETF industry also hit a record high of $3.9 billion in October.
In the face of competition and global volatile markets, asset managers are coming under unprecedented pressure to reduce costs, improve operational productivity and, ultimately, enhance competitiveness.
In 2017, Calastone anticipated that advances in robo-advisory and blockchain technology would emerge across the financial industry; affecting fund companies, distribution partners, custodians, and regulators. These were predicted to cut operational costs, risks and introduce efficiencies for fund managers.
2018 certainly saw a marked increase in leveraging financial technology across the asset management industry. As we begin 2019, Fintech is set to be the primary vehicle in enabling asset managers to compete with contemporary methods of investing, like ETFs.
Top three key Fintechs to watch in 2019
Blockchain has been and still is a widely discussed topic. The adoption of blockchain has started globally as well as in the Asia-Pacific region. For instance, the Australian Stock Exchange (ASX) announced last year that it would replace its registry, settlement and clearing system with blockchain technology by March-April 2021, with the aim of cutting costs for customers.
Many have a basic understanding of blockchain: blockchain-enabled distributed market infrastructure is immutable and fully scalable, providing a single version of the truth. It has the power to transform the value chain of the global asset management industry by allowing the market participants to share a timely, accurate view of fund transactions. This eliminates the need to replicate and reconcile records across the mutual fund purchasing chain, leading to a significant reduction in the frictional cost of trading, risks and operational pressure.
In fact, blockchain has the potential to create an entirely new form of business, as well as enabling innovative operating models.
Asset managers can also leverage ‘clean’ data that is available on blockchain. With such technology, managers can see exactly when a client bought their fund and the precise valuation the client owns; they can then trigger their calculations accordingly. This is because blockchain enables data to be fitted into ‘clean’ blocks, which allows managers to differentiate each transaction, through individual tranches. This isn’t possible with the current omnibus structure, as it lumps each investment into one transaction.
In the current market landscape where funds are underperforming, fees have come under increased pressure and scrutiny. With the standard infrastructure, fund managers cannot support a calculation where the client is only charged if its fund performs well. As a result, investors are turning to ETFs as a way of cutting out the management fees associated with active investing. Blockchain, unlike traditional investment methods, can support this calculation and therefore helps cut costs, allowing fund managers to compete with the passive investment methods that have made customers far more cost-conscious.
2018 was a year marked by volatility and robo-advisory has progressed significantly as a result. When the performance of traditional actively managed funds is consistently being challenged, investors are naturally looking for new ways to invest and generate returns – and, consequently, many of them are focusing on robo-advisory. Robo-advisory platforms, powered by technology, provide the investors with a far greater array of investment solutions compared to the traditional distribution platforms.
Another enabling factor is the large tech-savvy population in Asia. For instance, Hong Kong has a household broadband penetration rate as high as 92.5%, as of July 2018. Local investors’ growing adoption of digital tools and platforms is set to create opportunities for robo-advisory. According to IDC the total assets under management under robo-advisory in Asia Pacific is currently estimated to be around US$30 billion and is expected to reach US$500 billion by 2021.
However, one consideration to bear in mind is that robo-advisory requires a completely automated infrastructure and therefore requires digitization of operation models.
Data analytics is also set to take-off in 2019. According to the results of the ‘CIO Academy Asia Tech Trends & Priorities Survey 2019’, data analytics ranked highest, in conjunction with AI, as the technology trend expected to have the biggest impact on businesses in the coming two years. This was considered by 83% of respondents.
Several retail and private banks are continuing to cut the number of mutual funds amid escalating costs. There is increasing pressure on asset managers to better understand the appetite of end investors and to adjust their product and distribution strategy effectively.
We see a particularly strong demand for timely, or even real-time, data in today’s volatile environment. Market moving events, like Brexit and the US-China trade war, are instilling uncertainty and fear into the mindset of the investor. This leads to the need for real-time data updates: with timely data analytics, asset managers can easily see, for instance, where the fund flows are going and what the investment sentiment is.
Currently, many of the traditional data providers offer data around funds only in a retrospective manner, providing a limited baseline upon which to base a distribution strategy.
Challenges in adopting Fintech
There are of course challenges in adopting Fintech and it is not going be a completely smooth journey. In Asia, many of the financial services companies have varied levels of knowledge and experience with disruptive technology, including blockchain. Companies are sometimes somewhat cautious about changing their operating models. However, it is encouraging to see that the financial industry starts to appreciate the bigger picture and understand the longer-term benefits offered by technology, for example, significant increase in efficiency and an ongoing reduction in costs.
We believe the use of Fintech will be a priority in 2019, as key industry players continue to come under pressure to innovate, as a means of simultaneously growing their businesses and cutting costs. Regulators in Hong Kong, Singapore, and Taiwan have announced a series of measures with an aim to support the development of innovation and technology locally. As domiciles compete with each-other to be a Fintech ‘hub’ in Asia, the presence of technology will permeate Asian financial markets at an unprecedented rate.
(First published in Enterprise Innovation, January 2019, https://www.enterpriseinnovation.net/article/top-three-financial-technologies-watch-2019-322984028)