The future of funds distribution in Asia

Senior executives from leading Hong Kong asset managers expressed their views about Asia's changing fund distribution landscape in a roundtable discussion hosted by PwC.

Fund distribution in Asia remains highly fragmented with no single channel having dominance in every market. In Hong Kong and China, retail banks dominate the sale of fund products, while securities firms own the bulk of market share in Korea. In Australia, `wrap platforms' or master trusts are largely sold through independent advisors. But there is also a significant and growing group of `self-managed' investors.

Distribution in Asia*

_{* Source: Asset Management Industry bodies as of December 2013
** Insurance companies, e-platform, fund of funds, master trusts}

The rise of online distribution

The recent introduction of fund products sold through online platforms such as Alipay/Taobao has created significant disruption to traditional distribution channels in China. Roundtable participants noted the extraordinary growth experienced by online distributors over the last 12 months, albeit from a low base. Driving this growth was the high yields offered by these funds, relative to other financial institutions.

With online funds continuing to grow their customer base by the day, how are regulators likely to respond? Some participants observed that online platforms will face closer scrutiny from bodies such as the PBOC and CSRC. Governance issues such as KYC, AML, risk management and consumer protection are likely areas for consideration. But does more regulation necessarily mean a slowdown in growth?

Sean Colvin, a PwC consulting partner, says the industry should welcome innovations and that regulatory intervention is a normal part of any industry's growth. The real challenge for online funds will be around their capacity to offer more sophisticated products as the market develops.

Despite these potential constraints, online platforms will continue to lead the market in terms of service innovation. Consumers are not only attracted to the investment returns offered by online funds but also value the ease and convenience of transacting with a brand they trust.

In Japan and Korea, household names such as Nomura and Samsung dominate the distribution landscape, demonstrating how critical brand recognition and trust are in the minds of consumers.

While China has captured Asia's imagination with the growth of e-fund platforms, it is not the only market to do this. South Korea has launched an online fund supermarket, Funds Online Korea Network, while Thailand's Wealth Magik fund platform has also made its debut.

This phenomenon will likely drive a `paradigm shift' among asset managers, who will increasingly need to consider the customer experience as part of their value proposition.

Mutual recognition, mutual opportunities

The significant opportunity of a fund mutual-recognition agreement between Hong Kong and China was a topic of immense interest and discussion among roundtable participants.

One senior executive believes there is significant upside, but this will depend on market conditions and confidence in the wider economy. The executive cited the limited success of China's QDII programme that provided Mainland investors with the means of investing offshore. However, it was perhaps the timing of the QDII launch, right before the `Global Financial Crisis', that proved to be its undoing.

But just how successful could mutual recognition be for Hong Kong and China? One needs to look no further than Taiwan, which has had a long and successful track record of global fund sales, according to one asset management CEO. In 10 years' time, China could mirror Taiwan's success today - but on a much larger scale.

Longer term, as the market matures and demand grows for more sophisticated products, investor education will be key to winning new business. A joint effort by industry and government to educate the wider public is critical to moving retail investors away from a `stock picking mentality' towards an `investment mind-set', says one participant.

All round-table participants agreed that capitalising on mutual recognition would depend on having the right distribution model.

Participants were also enthusiastic about other cross-border agreements currently in development: the Asian Region Funds Passport (ARFP) and the ASEAN initiative. Both these schemes will facilitate the sale of fund products to retail investors in multiple markets. The other major benefit of these programmes will be the movement of capital from places where investors are seeking yield to destinations with the ability to deliver growth.

The ASEAN initiative was launched in July 2014, and as of the first quarter of 2015, five funds are already in the process of being authorised for cross-border sales. While this covers only three countries - Singapore, Malaysia and Thailand - the ASEAN Integration 2015 plan to create a single economic and trade region within South East Asia is expected to boost demand and investors' appetite to venture beyond their borders in search of yield. The ARFP programme under the Asia Pacific Economic Cooperation (APEC) agreement has much wider potential when it goes live in 2016. The APEC ARFP is now in its second consultation phase. Once the Memorandum of Understandings are signed by September 2015, national country regimes (starting with the six countries that have signed up, being Australia, Singapore, New Zealand, Korea, Thailand and the Philippines) will be expected to implement the ARFP into local legislation within 12 months.

Exchanges as a platform

Participants also raised the possibility of stock exchanges providing an alternative distribution channel.

The Australian stock exchange is already going down this path with the introduction of its `M-Fund platform', which will enable the trading and settlement of unlisted funds. Asset managers in the room discussed the possibility of Hong Kong playing a similar role with China. The Hong Kong and Shanghai stock exchanges recently launched their `Stock Connect' partnership. This scheme allows two-way investment between both markets.

One senior executive raised the possibility of Hong Kong becoming the international board for Chinese outbound investment. Conversely, it also creates the possibility of Hong Kong acting as a `master agent' for foreign investment into Mainland listed entities.

Regulation, a catalyst

Asset managers will serve the market by developing the right products and making them available through multiple channels. But it is regulators who will ultimately be responsible for facilitating this.

One participant highlighted that in the US, regulators were responsible for enabling investors to access their 401k pension accounts online, giving them a holistic view of their investment performance. The `Retail Distribution Review' in the UK will better align the interests of financial advisers with those of their clients. A similar review is being undertaken with the Federal Government's proposed `Future of Financial Advice' reforms. It should also be recognised that regulators and government in Australia helped to establish superannuation more than two decades ago. This has resulted in the world's third - largest mutual fund market today.

Clearly, the success of a distribution channel will depend in no small part on the regulator.

Looking ahead

Asia's fund markets are changing, and fast: the growth of its middle class, a rapidly ageing population, the disruption of traditional distribution channels by the entrance of new ones and opportunities to sell across borders are emerging, as well as the establishment of fund-passporting regimes.

These forces are prompting a rethink in how funds are distributed, and challenges the old notion that `funds are bought, not sold'. Distribution will no longer be a single-step process, but a multi-faceted one with many considerations. These considerations will include: investor segmentation, improving the customer experience, building stronger brand trust and loyalty, developing more relevant products and, of course, how and where to distribute.

The future for funds in Asia remains bright. The winners will ultimately be those that can build these considerations into an approach that leads to better customer engagement and meets their investment needs.