More investors picking managers based on cost

Choice of asset managers in Asia – as elsewhere – is being driven more and more by the fees these firms charge than the performance they have delivered. Even when it comes to active managers, increasingly investors are going for the cheapest provider, not necessarily the one with the best performance. If this trend continues to accelerate, fund management industry revenues could fall by as much as 30% in just two years.

So argues a report published last week by consultancy Oliver Wyman and Morgan Stanley, which also indicates some differences between the findings on Asia and elsewhere in the world. The study, The World Turned Upside Down, is based on a global survey of international asset managers with combined assets under management of $15 trillion.

Asian investor characteristics

For most Asian institutions, approaches to asset allocation, the use of investment consultants and selection, use and oversight of managers differs markedly from investors in Europe and North America. This makes them hard for traditional asset managers from those regions to serve, noted the report.

Tapping second-tier, smaller investors in Asia remains supremely difficult for global firms, confirmed Christian Edelmann, head of global corporate and institutional banking and wealth and asset management at Oliver Wyman.

By contrast, Asia’s 50 or so largest institutions – comprising the region’s sovereign wealth funds, pension funds and insurers – behaved identically to the most sophisticated players in Europe or North America in terms of asset allocation, use of investment consultants and oversight of managers, he told AsianInvestor.

The report identified some important trends among the larger players. Highly sought after by the major asset managers, these investors are continuing to put downward pressure on fees. While the use of so-called 'smart beta' is not as far as advanced in Asia as in Europe, found the research, the success of passive funds has seen Asian asset owners put pressure on fees charged by both passive and active managers.

That said, flows between active funds are still 2.5 times greater than flows from active to passive, the report found. Some 2% of total assets managed in passive funds in 2016 had flowed in from active funds; the flows between active funds accounted for 5% of the total assets under management in that sector.

The report found that total revenues for asset managers (active and passive) were likely to drop by 3% by 2019, with a worst-case projected fall of as much as 30% over that time. This decline will be driven by lower fees, which are likely to compress by 10%, and a 7% revenue decline caused by the shift to lower-fee products, over the same period, found the research.

A September report by consultancy Spence Johnson supports this view. While the amount of fees paid by institutional investors in Asia to fund houses would nearly double from $13.4 billion to $25.2 billion by 2025, it said, those asset owners' bargaining power would rise thanks to the growing concentration of assets with fewer managers.

Smaller institutions: less leverage

Yet while Asia’s largest investors are putting downward pressure on fees, the smaller ones have less leverage in this area, said Edelmann. These investors are harder to service, meaning they are also less sought after and can be less aggressive on fees. “They require managers to provide local servicing, language, reporting and distribution,” he noted.

That said, consultants and other investment service providers tell AsianInvestor that there is a growing focus on tapping smaller institutional clients in Asia, as competition is so fierce for servicing the biggest investors.