Funds must prepare for $4.3tr outsourcing surge

Global asset managers need to expand their local operations in mainland China and much of Southeast Asia if they are to fully benefit from $4.3 trillion of outsourced fund mandates over the coming decade, according to a new study by institutional asset management consultancy Spence Johnson.

The UK-based company’s study considered central banks, SWFs, insurance companies, pensions and other small asset owners (banks, treasuries, corporate, credit unions, etc) in 10 countries across the region. It calculated that the institutions’ assets under management (AUM) grew at a compound annual growth rate (CAGR) of 6.1% between 2011 and 2015, to reach $30.7 trillion. 

The study projects the institutions’ AUM will keep growing at a 5.1% CAGR until 2025 to reach $50.5 trillion. This translates into an estimated $4.3 trillion fresh mandate opportunities for asset managers, as total third-party outsourcing is expected to grow at a CAGR of 5.8% to $10 trillion by 2025.

The prediction suggests level Asia asset owners will slow the amount by which they are increasing their asset outsourcing; over the past five years the CAGR of asset outsourcing stood at 8.7%, according to the study. 

“The growth [in anticipated AUM outsourcing] is definitely slower than what we saw over the past five years; we expect the [existing] outsourcings to stablise among central banks and sovereign wealth funds (SWFs) while new opportunities will come up,” said Ng Sze Yoon, the firm’s director for Asia Pacific.

At the end of 2015, Asia Pacific institutions outsourced $5.7 trillion, or 18% of their total AUM to external managers. They provided 8% of their total AUM, or 45% of outsourced AUM, to global managers lacking onshore product manufacturing capabilities.

China’s asset growth

Japan stands as the largest country in terms of overall institutional AUM, possessing $10.9 trillion or 36% of the $30.7 trillion total at the end of last year. It was also the most active outsourcer, offering $805 billion in additional external domestic and international mandates between 2011 to 2015, compared to the $1.9 trillion total for the region.

China accounted for 23% of the combined AUM of the 10 countries in the survey, and approximately 9% of its AUM was outsourced. However, its institutional investor AUM grew at a CAGR of 11% between 2011 and 2015, and the country’s asset owners look set to provide the bulk of asset growth over the coming 10 years.

They are also set to continue acting as active fund outsourcers. Spence Johnson predicts China’s total addressable institutional outsourcing will reach $2.5 trillion by 2025. It said foreign managers could receive $1 trillion mandates by 2025, triple the $331 billion they were managing at the end of last year.

Sovereign wealth funds are also a likely source of new fund outsourcing mandates. The study said potential mandates are likely to come from newly established SWFs such as Hong Kong’s Future Fund, and other SWF type vehicles mooted in Indonesia and India. This suggest SWFs will provide a bigger absolute amount of total AUM although existing outsourcing will remain constant.

Ng added the outsourced asset growth is expected to driven by insurers and pension funds, which need to improve investment yields, while an expected reform of China’s public pension fund could also drive more outsourcing.

Domestic advantage

Ng said global managers are positive that they will receive fresh overseas mandates as regional asset owners are looking to increase overseas and alternative exposures.

But global fund managers may well need to expand or establish local operations in China, Malaysia, Indonesia and Thailand if they wish to take better advantage of domestically allocated fund management mandates. Institutional investors these markets have traditionally carried a home bias and not invested much overseas, and this domestic emphasis is likely to remain.

Regional institutions are expected to hand out $1.9 trillion in AUM of fresh global mandates over the coming 10 years, versus $2.4 trillion in additional domestic mandates. 

“[Institutions in] China and Southeast Asia tend to be more local-bias and under restrictions for overseas investments, but the fact is they are growing faster than other markets in the region,” said Ng.

Local capabilities and operations to manage domestic assets would help international fund houses enjoy better local knowledge, bigger client pool and help them more rapidly react to regulatory changes.

Foreign managers will also need to rethink their product strategies and team resources structure for special needs from the growing asset owners, one example is many managers have already had their insurance specialists across the region, she added.