PwC Asset Management Conference Asset management in Asia: Embracing a Brave New World October 2014 Over the past year, Hong Kong s asset management industry has undergone rapid and tremendous change amidst a shifting global economy, an increasingly complex regulatory landscape, and the dawn of a new digital era. As such, the theme for this year s 8th annual PwC Asset Management Conference was premised on Embracing a Brave New World. Recognising the need for asset managers to rethink and reshape their relationships with key stakeholders and adapt their operations and business models to embrace this new paradigm, we created a programme to spark discussion on the mega-trends shaping the industry s future. There are things known and there are things unknown, and in between are the doors of perception. Aldous Huxley (Author, Brave New World, 1894-1963 A grand vision for Hong Kong We were delighted and honoured to have Mr Charles Li, Chief Executive of Hong Kong Exchanges and Clearing Ltd. (HKEx), open this year s conference with his keynote speech. His address was delivered to an audience of nearly 200 PwC clients, business advisors, regulators and members of the government. Mr Li presented his vision to further cement Hong Kong s role as a gateway economy into Mainland China and and key financial hub within Asia. Essential to attaining the ultimate goal of prosperity, he said, is capturing a share of China s inbound and outbound trade flows, and capitalising on its ever expanding financial and secondary trading markets. Despite the excess supplies of capital in China, Li acknowledged the need for structural reform of the financial system. In addition, differences in culture and values, the gradual opening of China s markets, and the redeployment of its vast pools of capital were issues that need to be navigated.
Li stressed that Hong Kong s continued success would depend upon continuing to foster a robust and mutual relationship with the Mainland. But just what role Hong Kong should and will play, and whether this change will materialise fast enough were questions for the audience to contemplate. Views from the top A panel of industry leaders set the scene for the Conference, which featured a wide-ranging discussion on the major market opportunities, key challenges and strategic issues for asset management. Panellists discussed the changing needs of investors in Asia and their diminished appetite for risk. In private equity, large foreign institutional investors are looking for steady, safe and consistent distributions, which is a challenge as there is not enough supply of such funds in China. The impact of the HK-Shanghai Stock Connect was also discussed, with panellists agreeing that its introduction will bring new investors into Asia and drive market growth. While the impact of Stock Connect may not be immediately apparent, it could help to facilitate cross-border activity within the region. Participants believed activity on Stock Connect could be used to gauge the pace at which RMB Internationalisation was happening, and to measure the appetite of Mainland investors for foreign equities. Other trending issues and opportunities discussed by the panel include: Diversification from ETFs and money market funds towards more sophisticated investments Demographical changes and the impact on retirement planning The impact of technology and other disruptive forces on businesses; technology will enable investors to gain cheaper and easier access to products, and allow more transparency regarding costs which need to be justified Opportunities in the growth of private equity in China Increasing regulatory oversight resulting in greater costs and pressure to generate returns for businesses The regulation and institutionalisation of the hedge fund industry Opening of borders and markets will continue Pressure on revenues and fees will continue to grow Breakout Sessions Conference-goers had the opportunity to attend break-out sessions to go in-depth on a range of topical issues spanning innovation in operations and technology, regulation and emerging markets Delivering the vision innovation in operations and technology This session explored ways in which operations and technology are adapting to meet the challenges brought about by the disruptive forces outlined in PwC s AM 2020 report. The panel discussed the challenges they face in allocating technology spend across both innovative areas, such as big data and analytics, and essential projects, such as regulatory change, operational efficiency and cost reduction initiatives, systems integration and upgrades. They debated the potential impact of behavioural change on distribution, especially the shift to digital (specifically mobile) distribution channels and the increased use of social media to connect asset managers and intermediaries with end investors. Increasingly, technology will become mission-critical to driving customer engagement, gaining insights on clients and potential clients, operational efficiency, regulatory and tax reporting. Panellists outlined how they considered funds might be bought instead of sold with self-directed investment. The extraordinary rise of the Yue bao online fund offering by Alipay was discussed, in particular whether this would be replicated in other Asia-Pacific regions and with asset classes other than cash. While the panel were split on whether traditional bank distribution channels were in decline, there
was recognition all around that the industry will have to adapt to a new generation of investors who rely on their mobile devices to connect and transact. Regulatory pressure was seen as both a potential barrier to change, particularly the cumbersome and manual KYC checks and on-boarding processes, but also a potential catalyst for positive change, for example by mandating greater transparency and encouraging new market entrants and facilitating greater competition, to bring down relatively high costs incurred by end investors, while maintaining the focus on investor protection. Nothing to hide, nowhere to hide and nothing at risk The regulatory landscape for asset management has become ever-more stringent alongside increasing levels of scepticism and risk aversion amongst investors. This session addressed the major hurdles the industry faces and how it can continue to build and strengthen its trust with the public. Addressing anti-money laundering (AML), the regulators on the panel highlighted three areas of focus: (i) Customer Due Diligence; (ii) Potentially Exposed Persons; and (c) reporting to the Joint Financial Intelligence Unit (JFIU). A question the audience was asked to consider is why there is seldom reporting to JFIU by asset managers given the enormous amounts of capital that passes through their hands. Another key concern from the market in relation to the current regulatory regime relates to compliance cost and harmonisation of rules. Regulations are evolving rapidly and becoming increasingly complex and market participants are having to rely heavily on service providers to meet these new rules. However, there is inconsistency in application and implementation. The difficulty in finding and maintaining staff resources with worldwide regulatory compliance knowledge was addressed, as well as the subsequent need to train the next generation to cope with the ever-changing rules and regulations globally. Panel members were of the opinion that the operations of the business, including corporate governance, rests ultimately with senior management. With regards to outsourcing, it was stressed that while functions can be outsourced, obligations cannot. Buyers beware: A guide to Asia s emerging markets This session discussed some of the opportunities and predominant risks associated with emerging markets opportunities. A common trend identified by the panellists is the tendency for funds and similar financial investors to focus on the quality of financial reporting of PRC companies listed overseas. Increasingly, they are engaging in short selling due to concerns of financial reporting fraud. Common red flags in emerging market companies to look out for include a large portion of shares being held by the Chairman or company CEO; companies that appear to be performing consistently well against its peers; and the too good to be true scenario where almost all supporting documents and accounts can be provided. The importance of due diligence was also stressed and panellists agreed that it is essential for every investor to know who they are doing business with, the operational matrix and associated risks of the targeted industry. Attendees were encouraged to be sceptical, to have a Plan B to mitigate risk, to take a 360 approach and to seek further explanation and undertake additional due diligence when necessary. Distribution Strategy: Moving the customer centre stage Distribution is looming as the key battle ground for winning market share and new customers for asset managers across Asia. The final session of the conference explored the emergence of alternative distribution platforms in response to limited competition, significant barriers to entry and investor choice. The discussion opened with an analysis of how the investor base is changing. The panellists discussed the changing needs of investors in Asia generally. Institutional investors are more willing to invest in alternative and diversified portfolios over traditional asset classes. This has resulted in a wave of new hedge and PE funds emerging to cater to the market s growing appetite for alternatives. The dynamics of the retail landscape has also changed dramatically. The emergence of online platforms in China offered by e-commerce firms such as Alibaba, Tencent and Baidu have disrupted a market traditionally dominated by banks and insurers. In Hong Kong for example, banks control nearly 80 per cent of fund sales, highlighting the concentrated nature of distribution here in Asia. Participants questioned the long-term viability of online platforms. Can they provide the same level of service for more sophisticated and heavily regulated products to investors? Whatever the case, it is clear that online platforms have forced asset managers to rethink how they engage with and build insights from customers. All panellists agreed that a successful distribution model must be underpinned by investor education. A more educated investor base not only lays the foundation for meaningful engagement but is necessary for imparting an investment mind-set among investors.
But whatever direction the industry takes, regulators will need to play a central role in creating the rules, the frameworks and overall strategic guidance necessary for the asset managers and investors alike to flourish in a brave new world. A special thank you to all of our speakers and panel members for sharing their insights and making this year s AM Conference another success. Andrew Reynolds Managing Director, Chief Financial Officer and Head of Corporate Strategy, Asia Pacific, BlackRock Bénédicte Nolens Senior Director, Head of Risk and Strategy, Hong Kong Securities and Futures Commission Blair Pickerell Chairman, Asia, Nikko Asset Management Charles Li Chief Executive, Hong Kong Exchanges andclearing Limited Choy PengWah, Vice Chairman, Board of Directors and Chief Executive Officer, Harvest Global Investments Limited Dean Chisholm, Regional Head of Operations, Asia Pacific, Invesco Limited Derek Sulger Partner, Lunar Capital Management Limited Genio van der Schaft Chief Financial Officer and Chief Operating Officer, APG Investments Asia Limited George Long Founder, Chairman and Chief Investment Officer, LIM Advisors Limited Heide Blunt Managing Director, Head of Asia Pacific, AIMA Lieven Debruyne Chief Executive Officer, Head of Intermediary, Asia Pacific, Schroder Investment Management (Hong Kong) Limited Pauline Wong Senior Vice President, Managing Director and Chief Operating Officer, Global Services, State Street Bank & Trust Company See Li Chian Senior Vice President, Legal & Compliance, Blackstone Group Stephen Po Senior Director, Intermediaries Supervision Department, Intermediaries, Hong Kong Securities and Futures Commission Steve Bryant Chief Operating Officer, Greater China, SchroderInvestment Management (Hong Kong) Limited
PwC Global Asset Management Network PwC helps organisations and individuals create the value they re looking for. We re a network of firms in 157 countries with more than 184,000 people who are committed to delivering quality in assurance, tax and advisory services. Providing organisations with the professional service they need, wherever they may be located. Our highly qualified, experienced professionals listen to different points of view to help organisations solve their business issues and identify and maximise the opportunities they seek. Our industry specialisation allows us to help co-create solutions with our clients for their sector of interest. PwC has continued to support Asia s asset management industry as it undergoes a period of major transformation and change. Besides assisting our clients navigate these challenges and opportunities, we continue to pursue dialogues with regulators, industry bodies and governments, enabling us to stay close to the strategic and emerging issues impacting our clients, deliver advice that is both relevant and timely, as well as helping shape policy development. For more information visit www.pwchk.com.hk/home/eng/ fs_investmentmgt.html PwC Contacts Marie-Anne Kong PwC HK Asset Management Leader Tel: +852 2289 2707 marie-anne.kong@hk.pwc.com Florence Yip PwC Asia Pacific Financial Services and Asset Management Tax Leader Industry Leader Tel: +852 2289 1833 florence.kf.yip@hk.pwc.com Anthony Tong PwC HK US Tax Consulting Group Leader Tel: +852 2289 3939 anthony.tong@hk.pwc.com Jeremy Ngai PwC HK, China Tax and Business Advisory Services Partner Tel: +852 2289 5616 jeremy.cm.ngai@hk.pwc.com Roger Emms PwC HK Consulting Associate Director Tel: +852 2289 5002 roger.p.emms@hk.pwc.com Carlyon Knight-Evans PwC HK Asset Management Partner Tel: +852 2289 2711 carlyon.knight-evans@hk.pwc.com John Donker PwC HK, China Forensic Services Leader Tel: +852 2289 2411 john.donker@hk.pwc.com Helen Li PwC HK Asset Management Partner Tel: +852 2289 2741 helen.l.li@hk.pwc.com Matthew Phillips PwC HK Financial Services Leader, Deals Partner Tel: +852 2289 2303 matthew.phillips@hk.pwc.com 2014 PricewaterhouseCoopers Limited. All rights reserved. PwC refers to the Hong Kong member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. HK-20141110-4-C2