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Asia’s managers sweat it out in Europe

With at least 32,000 investment products and 4,000 managers servicing the European market, do Asia-based asset managers have a reasonable chance to compete?

A number of asset managers based in Asia have attempted to tap the European market with little success, according to a study by Northern Trust.

For example, China Asset Management established its Luxembourg Ucits range of products in 2010 to sell in Europe. Assets of these funds sold via its Hong Kong subsidiary totalled $454.9m or just 0.7% of its total AUM.

Nikko Asset Management set up a presence in Europe in 1996 and now sells 13 funds in that region. However, total assets stood at just $309m at the end of January, accounting for just 0.14% of its total AUM.

Similarly, Mirae Asset Global Investments, which operates in 12 European markets, only has 1.96% of its AUM sourced from European investors. Value Partners, which has five Ucits funds in Europe, has only sourced $211m, or just 1.3% of its total AUM, according to the report.

According to the Northern Trust report, Asia-based managers haven’t been successful so far as there are many different considerations that must be taken into account before launching or building an operation in Europe.

Distribution landscape

Unlike the Asian market, the European market is 73% institutional, which means distribution is largely business-to-business, with limited sales made directly to the retail investor.

“Asian asset managers who are used to selling products directly to individuals and enticing them with free phones or other inducements will find that a similar strategy will not work in Europe,” the report said.

In addition, retail distribution across Europe may vary widely from one market to another.

Source: Northern Trust report

For example, the UK retail space is dominated by independent financial advisers (IFAs), which account for 60% of fund distribution in the market, according to the report.

The size of the IFA channel may appeal to new entrants, but it is dominated by domestic funds.

“Managers need a presence on-the-ground to understand the market and forge key relationships.” the report said.

Turning to continental Europe, the study said that Asian managers wishing to offer institutional and retail products may choose to build relationships with banks, as they make up at least 80% of distribution in many countries.

However, European banks are keeping costs down and are reducing the number of asset managers they work with, which is driven by the Mifid II directive, the study noted. The average bank’s third-party buy list is just 21 providers and is expected to be reduced to as few as half a dozen.

“This, in turn, may offer both challenges and opportunities for fund managers. While banks may focus on building up their range of in-house funds, they may also develop white-label agreements with specialist fund managers, giving rise to sub-advisory opportunities,” the study said.

Local office

Given the complicated distribution landscape, Northern Trust suggests that setting up a local sales team is key.

“Managers of a significant size should make their local presence felt. Smaller managers can begin with one or two targeted markets or channels, or they could selectively work with an established third party marketing firm,” it said.

Hendrik Von Ripperda-Cosyn, London-based country head and senior director for EMEA sales at Value Partners, highlighted the importance of having European operations instead of just simply registering funds in the region for distribution and replicating its Asia-focused products.

Similarly, Bea Union Investment, which joined the Swiss-Hong Kong mutual recognition of funds scheme, is facing difficulties with fund distribution in Switzerland and is now seeking a strategic partner that would help market its products to distributors. The firm does not yet have operations in Europe.

The report noted that success will take time. European fund buyers, including distributors, generally require a three-year track record before investing in a product. In addition, they are more comfortable in products with at least €100m ($115m) in AUM.

The Ucits dilemma

Establishing Ucits funds has become a common strategy for Asia-based asset managers that are planning to expand in Europe, given that the platform is recognised across the European market.

Having a “scattergun approach” (registering funds in each jurisdiction), may seem easy and should theoretically attract the largest possible pool of clients. But the risk is that it involves significant cost with no guarantee of raising assets, according to the Northern Trust study.

“Setting up a Ucits fund structure does not mean registration in each country will be an identical experience. Different countries have different requirements, including a variety of registration costs, agent fees and marketing rules. Ensuring marketing materials, such as fund factsheets, comply in every jurisdiction can be a costly exercise,” it said.

But having a Ucits fund structure has its own merits as well, according to the report.

Managers targeting large European institutional investors as well as the retail market would be better served by Ucits funds than Cayman-registered funds, which tend to target only a small pool of sophisticated investors. In addition, managers can launch Ucits funds in both their home markets, such as in Hong Kong, and across Europe.

Part of the Mark Allen Group.