Is Asia's funds industry a failure?

The last 30 years can be seen as a failure for Asia’s financial services industry in the sense that the average person in the region still has an under-managed portfolio, says semi-retired industry veteran Blair Pickerell. 

He semi-retired in July after some three decades working in fund management in the region, most recently as Asia chairman of Japan's Nikko Asset Management.

Reflecting on that time at AsianInvestor’s Fund Selector Forum in Hong Kong last month, Pickerell was scathing about the level of investor education. But he conceded it was an open question whether industry professionals or investors themselves were to blame.

He cited two key challenges that Asia’s financial industry faces. The first is investor behaviour. Retail clients tend to buy a few funds of a risk-heavy nature that were yesterday’s winners in any case, then churning their portfolio. “The industry is old enough, we should have gotten that right by now,” he said. “Investors are not really behaving the way they should.”

Secondly, Pickerell pointed to over-regulation, reciting an anecdote about Paul Chow, former chief executive of Hong Kong’s stock exchange. He noted how Chow had visited a bank to buy a fund after he had retired. He was asked what his job was, whether he had experience with derivatives, options and warrants and whether he had ever invested in this type of asset before.

Chow responded that he was retired, that he had supervised the trading of all of those things and that he had never made such an investment. He was then told he could not buy the fund.

“In Asia the wealth is growing, the middle class is growing and pension funds are growing, plus the number of people wanting to sell funds is growing,” said Pickerell. “There should be a big party going on. 

“So regulation is potentially a major barrier. The friction between buyer and seller has gotten quite high. The regulators are trying to force the right thing, but they aren’t doing a very good job.”

Pickerell suggested the broader financial services industry – not solely asset management – should shoulder its part of the blame, having created such instruments as accumulators and minibonds in the first place. (Both of these instruments generated big losses for investors in Hong Kong and Singapore during the 2008 crisis- though whether the industry or the investors were more to blame is another question.)

Still Pickerell said he was worried by the fact that the concept of “buyer beware” had vanished. He questioned the psychology of strict regulation in Asia, which he said was not only about protecting investors but also regulators from complaints. “I can still buy a fund in five minutes in the US; it is a very different mindset [there],” he added.

He argued that 90% of funds in Asia were sold and not bought, against an estimated 50% in the US. “Half the market for funds in the US is no-load; people go looking for a good deal. That bought side just does not exist in Asia, never has and you have to question whether it ever will.”

While Pickerell said he was a fan of advisory services, he noted that Asian investors had proved unwilling so far to pay for them despite them being a potentially more affordable option than transaction-based charging.

He observed that funds with higher fees sold better, adding that people appeared more willing to buy a fund charging 150 basis points and end up spending thousands of dollars a year rather than paying 70bp to an adviser. “People just don’t want to get their cheque book out [for advice],” he said.

Asked what needed to happen to change the industry for the better, Pickerell pointed to distribution. “I argue there is no product that has been invented in the past 10 years that we need,” he stated. “You could create a perfectly good portfolio from the products created 10 or 20 years ago. Every other product that has been launched since is really marketing-orientated.”

He said the solution had to be distribution-driven, whether it came from robo-advisers or a fintech firm such as Alibaba or Amazon, or from investors behaving more like they do in other markets.

“There are days when I feel I can retire, that I have contributed to the industry,” explained Pickerell. “At the same time there is so much left to be done because the average person in Asia does not have a proper portfolio. In that sense you can argue the last 30 years has been a complete failure.”

He said he was surprised that more fund houses did not try direct distribution, and reflected that the industry was heading the other way, with HSBC having sold its direct business in Taiwan and JP Morgan having essentially exited its direct business in Hong Kong.

Pickerell also questioned why senior people in the industry were not promoting financial and retirement planning via Chinese-language media. “Where is that education effort? I see almost no firms in the industry doing it,” he said. “I don’t see a huge amount of it happening among IFAs either.”

He argued that the industry needed to band together, contribute to raise a few million dollars and drive education messages home. 

“Until we as an industry convince people that investing for the long term in a diversified way makes sense, why is the average kid graduating from high school going to have these things in their head?”