Hurdles for Year of the Horse: No 5

Asset managers in Asia faced some considerable challenges last year, not least of which was delivering consistent performance returns amid volatile markets.

The hurdles promise to be no less high in Year of the Horse. AsianInvestor has identified five key factors that we believe fund firms must get right to foster future growth and emerge as winners at the year-end finishing post.

Over the next week or so we will run our selections in descending order of importance as we rate them, starting today with cost control at number five. Not sexy by any means, and some argue most houses have already factored these in.

But preparation is important as 2014 contains some key dates that threaten to have a material impact on the fund management industry in Asia Pacific. Getting this wrong will be costly, and there could be decisions to make – should Europe’s recovery gather pace and require a more active response to the Alternative Investment Fund Managers Directive (AIFMD), for example.

For this article, we sought the views of a range of industry professionals including asset management CEOs, portfolio managers, institutional and retail salespeople, distributors, custodians, lawyers, consultants, recruiters and research analysts.

Thank you for your input, and we welcome your feedback.

5. Cost control
Compliance-related obligations have risen sharply in recent years, notably from the US and Europe, and 2014 will see the bar raised high for financial firms’ profitability.

US extraterritorial law the Foreign Account Tax Compliance Act (Fatca) will place burdens on the operational functions of non-US managers from this July. Fund houses must report American clients’ financial details, and those that don’t face a 30% tax on US-sourced income. Fund firms can register with the Inland Revenue Service until April, or will need to demonstrate they’re in the process of applying.

Reporting requirements for the Volcker Rule also begin this summer, to be phased in over two years. This has impacted the funding environment globally, precluding banks from backing hedge funds, private equity funds, investment trusts and joint ventures. The rules were finalised in December last year as part of the broader Dodd-Frank legislation, but implementation will likely evolve.

Nor is America the only writer of new rules. Europe’s AIFMD will become more relevant for Asian firms from mid-2014. Very few alternatives managers have gone to the expense of complying with disclosure requirements, partly as a reflection of tepid demand in Europe. The universal approach has been to use private placement. Now some European firms are emerging as platform providers to help Asian firms navigate the terrain. Should alternatives appetite in Europe pick up this year, managers may need to adjust their approach.

Separately, buy-side firms will be mindful of mandatory clearing being phased in around Asia this year for over-the-counter derivatives transactions. New rules will be implemented in Hong Kong, Singapore, Japan and Korea.

Meanwhile, there are global pushes towards best practice that could impact Asian fund firms in 2014: in trading the move towards changing commission payments to brokers to unbundle research from execution; and in distribution towards the separation of advice from fund management. Both are on the agendas of regulators globally, and changes could happen quickly.

The outsourcing of middle-office functions may pick up this year as smaller managers seek to cut costs.

Firms will also need to ensure they are efficiently structured amid a global squeeze by governments on cross-border tax avoidance.