• Welcome
• Globalisation of funds: challenges and opportunities. Where next?
• Qualified Domestic Institutional Investor Scheme - Update

Welcome

Jervis Smith
Managing Director, Global Head of Managed Funds & the Middle East, Financial Institutions Group, Citi

Welcome once again to Spotlight, our newsletter for investor clients and consultants. This edition examines a second piece of research, sponsored by Citi, analysing the challenges of globalisation in asset management industry by CREATE - an independent think tank specialising in strategic change and emerging business models in global financial services.

Of the issues uncovered by the research it is clear that asset managers are making progress in a variety of new areas, yet they are delivering mixed results. The research raises a series of questions about the complexity of current asset management operating models to the management styles employed.

In this issue of Spotlight, Professor Amin Rajan, CEO CREATE, examines some of the implications highlighted by the research while George Hindmarsh, Head of Asia Sales Desk for EMEA, Securities and Fund Services, Global Transaction Services, provides an update on the opportunities presented by the Qualified Domestic Institutional Investor Scheme (QDII) to western asset managers.

Globalisation of funds: challenges and opportunities. Where next?

As domestic markets have matured over this decade, fund managers have rapidly ventured abroad in search of new clients and higher returns. The pace of this change has become evermore dramatic as pension clients demand all-inclusive global mandates and retail clients look to funds with universal themes.

As half of the fund assets have come to be held outside the domestic markets, significant capability has been created in over 70 countries via a mix of new starts, organic growth, M&As and local alliances.

However, this opportunistic mix has conspired against the potential synergies in front, middle and back offices. A brief analysis of the key findings revealed by the research demonstrates how establishing a global footprint has come at a price for many fund managers. Business tensions have been inevitable in revenue sharing, capacity sharing and product development when products of one unit are sold by its peers elsewhere around the world.

Cultural and linguistic differences have been a major contributory factor also. As the 'lingua franca' of business, English has not prevented mutual misunderstandings in Asiatic and Continental countries.

Worst of all, few CEOs at the centre or in the regions have had the management bandwidth to run a global business with little forward spend on training in capabilities as diverse as, for example, balancing the inevitable contradictions in the matrix organisation, resolving tensions, rethinking the mental boundaries of businesses and working as equals with people from other nationalities. However, these are no more than 'teething problems' associated with rapid growth.

On the upside, at least two in every five asset managers report that going global has delivered "positive impacts" in a range of areas that collectively influence their ability to grow their business via cross border clients.

These include investment performance, business brand, talent process, client attraction, relationship with local regulators and cross-border alliances, to name a few. Thus, there are clear winners. Around two in five managers have succeeded in minimising the complexity inherent in all global businesses by paying a lot of attention to the nuts and bolts issues in the critical areas like scalability of investment strategies, operational excellence and incremental integration via alliances with the best-of-breed distributors and back-office service providers.

Globalisation is without doubt here to stay, yet there is nothing inherent in the concept of globalisation that automatically delivers success. While the benefits are manifold, they demand hard graft, not bold fixes.

Four factors have been singled out as being critical to success:

All round leadership

Qualified Domestic Institutional Investor Scheme - Update

The rapid developments in the asset management industry in China represent the single largest growth opportunity in investment flows of any financial services industry globally. According to a recent McKinsey report (Financial Services, 10/07) assets under management are forecast to increase at a rate of 24 percent annually for the next decade, "making it the fastest growing segment of financial services in China - and the world."

Working with local institutions to develop and build offshore investment products via the Qualified Domestic Institutional Investor Scheme (QDII) represents an excellent way for foreign asset managers to build their China exposure. However, with the emergence of intense competition limiting the entrance through the QDII scheme the window of opportunity is shrinking rapidly.

China is now actively encouraging its investors to diversify abroad via international funds. In many cases, there is a role for a foreign asset manager to act as sub-advisor by lending their established investment management expertise, proven product design and broad experience in the global markets.

The total QDII investment quota available to banks, insurance, asset management and securities firms stood at $42 billion as at end September 2007, of which $11 billion has been invested. Given an expected investment in QDII funds of around $20 billion over the next couple of years, the outlook is positive.

To encourage QDII, Chinese authorities have sought to stimulate capital outflows to counter upward pressure on the Renminbi by loosening certain regulations. In July 2007, authorities eased the strict limits on the amount QDII funds could invest in offshore equities.

During this period, they also relaxed the requirements of international firms to participate in the QDII scheme, which previously could only be achieved by way of joint ventures with local managers. Chinese asset managers have so far launched five offshore equity mutual funds raising $4.4 billion - three of the firms are joint ventures involving international firms. The other two appointed international asset managers as sub-advisors. To date, a further six to eight local firms have had their QDII license approved. With advisory fees ranging between 40 to 80 basis points, the role of asset manager as advisor has become a potentially lucrative role.

For asset management firms looking to participate in the scheme they should act quickly. The limited number of domestic fund managers and insurance companies in China are steadily partnering up with foreign players. Unlike the QFII scheme, where the waiting period is approximately 18 months before entering the market, QDII partnerships can be implemented in two to three months.

As the first bank in China to launch and distribute international funds into the domestic market, Citi is also the largest global custodian bank for QDII participants. We are well positioned to help clients identify and secure a like minded partner and understand/keep abreast of the complex regulatory environment through our local presence and relationships. Coupled with our globally consistent services and systems Citi can deliver the security and efficiencies our clients need to capitalise on the increasing trend towards globalisation highlighted by Amin Rajan's research.