Federated Hermes is looking at opening an office in Hong Kong under a new distribution strategy for the region drawn up by the Anglo-American firm late last year.
Jim Roland (pictured), head of Asia Pacific distribution, disclosed the plans during a recent interview with FSA in which he outlined the firm’s intention to significantly strengthen its wholesale distribution efforts in Asia.
He said that the plans for the Hong Kong office were tentative at this stage, but that it would help address a glaring shortcoming in the firm’s regional footprint.
“We don’t have an office and I think that sets us apart from our competitors and not in a good way. Ultimately, I think if we’re going to be successful in our strategy, we will have to have an on-the-ground presence in Hong Kong,” he said.
“We don’t want to move too far too fast. We’re making a couple of hires immediately. We want to get those team members integrated. So it won’t be a 2024 move. But it will be something that we reflect on at the end of 2024 and depending on how well we’ve done in executing the strategy, we’d consider it in 2025 or 2026.”
New blueprint
Having been appointed to succeed Jake Nilsson in May last year, Roland only officially took up the reins in October and relocated to Singapore this January.
However, having previously served as head of the international client group, in which he looked at the firm’s engagement with the top financial institutions globally, he was already familiar with the Asia business, allowing him to put in place a distribution strategy swiftly.
When asked by FSA about the new distribution strategy, Roland said, borrowing a metaphor from former UK Prime Minister Tony Blair, that his top priorities were “wealth, wealth, wealth”. Globally, about half of the firm’s AUM came from wealth, although he felt that the firm was not punching its weight in Asia.
“We’ve done a reasonably good job in institutional sales in Asia and as we were building through that effort for strategic client planning into forming an overview, we identified a lot of blank space on the page for global financial institutions and most of the top of the league table we just haven’t really done much with in Asia,” he said.
Venn diagram
Private banks are clearly the main focus, unsurprisingly as they make up the biggest source of revenue in the wholesale space, although Roland also identifies family offices as an important growth segment as well.
Roland concedes that family offices are a tough nut to crack, a fact he knows well first-hand having previously served as director of North American hedge fund sales during a previous stint in Janus Henderson, but he recognises that the opportunities in the region are manifold.
Asia continues to mint more millionaires and billionaires at a record pace. Earlier this year, Singapore, for example, which rivals Hong Kong as a family office hub in the region, disclosed that the number of single family offices in the city-state rose to 1,400 last year, an increase of 27%.
“We want to sort of zoom in on the whole wealth ecosystem and obviously that intersection between private banks and family offices is really interesting. If we have a credible business with family offices that only helps us with private banks and vice versa. We want to be in the middle part of that Venn diagram,” he said.
New hires
Roland was tight-lipped about specific targets, noting that the firm does not break down its results by region. (Although, the firm recently disclosed that group AUM hit a record $779bn during the first quarter, helped by its ever-growing cash business).
“We have targets. We don’t break out the AUM by Asia, but we expect meaningful growth in Asia over the next five years, substantial as a percentage of AUM today and for the firm as a whole,” he said.
Regarding headcount, he is more forthcoming about the plans afoot to support the rollout of the new distribution strategy. The firm currently has 16 people in Singapore across investment, distribution and support functions as well as two in Australia and two in Japan.
The most recent hire was in Japan, where Kozo Fujioka was recently brought in from T Rowe Price to lead financial institution sales. He complements the current Japan head Wataru Horii (“a real gold-plated DB pension salesperson”, according to Roland).
The firm is also recruiting in Australia and Singapore in wholesale distribution. He said that the Australia hire will most likely someone with a traditional asset management background, whereas for the Singapore hire he is looking at some “atypical” candidates, those from a private bank or external asset managers, to help with the family office push.
Cash is king
If Federated Hermes is to succeed with its strategy in winning more business with private banks and family offices, Roland is aware that it is not just enough to have the right personnel in place, but the firm also needs to offer the right products.
Here, Federated Hermes may well have a trump card compared to its other competitors among the mid-tier asset management firms given the strength of its cash business, which makes up just under three-quarters of group AUM.
Long seen as a loss leader among asset managers, last year witnessed record inflows into money market funds, eclipsing even those recorded during the pandemic, as investors sought to lock in higher yields and escape some of the volatility following the banking crisis in the US.
Roland describes cash as “front and centre” of what Federated Hermes is trying to do in Asia and the firm is clearly trying to capitalise on its expertise in the US in this area. Deborah Cunningham, chief investment officer of global liquidity markets, is due to travel to the region shortly to meet with key private banks and family offices.
Although, the concern is that if the Fed does begin cutting later this year as widely predicted and the appeal of cash diminishes, where that leaves Federated Hermes. Roland argues that the strength of the cash business makes it a lot easier to move clients further along the yield curve subsequently.
Middle Kingdom
Conspicuous by its absence in Federated Hermes’ strategy is mainland China. It seems as if barely a week goes by without another asset manager announcing a new strategy there, whether it’s a product launch (admittedly less fashionable nowadays) or a new licence.
The holy grail for most asset managers is to operate as a wholly foreign-owned public fund management company (FMC) in China, which allows them to tap the country’s vast retail investor pool.
BlackRock got the go-ahead in 2021 to become the first FMC, although several others have followed suit. None of them have really been as successful as the firms would have hoped though, which is something that gives Roland pause for thought.
“We’re small and when you look at some of the larger firms who have massive legal, government affairs and regulatory people on the ground, frankly it looks like they’ve all struggled to penetrate,” he said.
“With the best will in the world, if they can’t do it, I’m not sure we can. We haven’t written off China, but it’s not part of our five-year growth plan to make any moves into mainland China.”
Conversely, Roland said that the emphasis was on covering mainland China from an offshore angle in Singapore and particularly in Hong Kong, especially when the firm is up-and-running there.
