U.S. Asset Management: Raising AUM from APAC Sources
Given the competitive, crowded and fragmented condition of the U.S. asset management industry, it is incumbent upon U.S. asset managers to look overseas to add AUM. APAC (Asia-Pacific) sources of capital are attractive because wealth has grown in APAC regions, translating into a growing institutional investor base and the search for alpha and diversification into safe investments outside their local market. APAC countries have been the fastest-growing asset management market among global markets and continues to grow at double digits. Furthermore, the %AUM growth in the APAC region is greater than the %AUM growth in the U.S. The APAC region has been a growing source of AUM for U.S. hedge funds and other licensed asset managers. Nonetheless, there is still tremendous potential for further growth. U.S. asset managers are at risk should they avoid increasing their AUM from APAC sources.
Globalization
Globalization has had an impact on asset management and asset allocation choices for institutional investors in “developed” APAC countries or special regions. This includes Japan, Hong Kong, Singapore, South Korea, Taiwan, and Australia. Moreover, globalization and fewer restrictions on exchange listings (e.g., the rise of American Depository Receipts (ADRs)) have led to significant growth in cross-border transactions by institutional investors between the U.S. and other countries. Differences in global regulations by country have narrowed, thereby reducing the
opportunities for regulatory arbitrage among asset managers. Overall, regulatory barriers-to-entry have been significantly reduced allowing asset managers to operate on either an onshore or offshore basis. This has led to material cost reductions for asset managers.
Globalization issues for asset managers also include liquidity concerns, and how to deal with the arrival of Black Swan events such as the 2008 global asset liquidity crisis. Liquidity becomes critically important during volatile markets. U.S. markets offer one of the greatest liquidity pools of all capital markets and the liquidity of U.S. markets is considered by institutional investors in APAC countries as a safe haven with favorable risk-reward attributes. Liquidity is multi-faceted but generally refers to how fast an asset can be bought or sold without substantially its price. Recently, the key drivers of increased liquidity in U.S. markets include the proliferation of financial products through innovation, strong economic performance, and the fact that excess savings from emerging markets have already found its way to the U.S. in search of higher risk-adjusted returns.
APAC Institutional Investors
Public and Private sector pension funds, superannuated schemes and investment companies are the leading institutional investors in APAC countries. The value for APAC institutional investors of investing in global financial markets is to achieve higher risk-adjusted returns. Surveys by Asia-Pacific-Based Institutional Investor Universe shows that 70% of institutional investor respondents plan to invest globally. More recently, APAC institutional investors have responded to global economic conditions by becoming more conservative in the structure of their portfolios and diverting funds to what they believe are safer assets such as alternative assets and private assets. Countries, like Japan, for example, have experienced negative real interest rates since 2016. There is a hunger for yield (income) among investors in such environments. Yield products that have a track record and provide alpha returns are very attractive in these countries.
APAC Profile of Overseas Asset Managers
The factors that institutional investors in APAC countries are looking for in an asset manager is directly related to investor attitude toward risk. Most institutional investors in APAC countries view credibility, performance, consistency and reliability, as well as an enviable track record as factors when selecting an asset manager. These factors are closely followed by fee structure or (MERs). Considering the nature of global economic and financial conditions, their remain pockets of opportunities to increase AUM for U.S. asset managers and higher risk-adjusted returns for APAC institutional investors. One of the most effective means of dealing with uncertain or adverse conditions for APAC institutional investors is diversification and to recruit active managers with a track record of prudent risk management. A survey by FleishmanHillard reported in The Future of Asset Management in Asia 2022 indicates that overseas asset managers are “preferred for their performance (53%), track record (45%) and trustworthiness (43%) by investors over local players.” This represents one of those pockets of opportunity for preferred U.S. asset managers to increase AUM in the APAC region.
Conclusion
Given the competitive and fragmented structure of the U.S. asset management market, one way for U.S. asset managers to expand their AUM (and thereby, increase their revenue) is to diversify their business model expanding into APAC markets, raising AUM and providing a range of investment products. Many U.S. hedge funds already operate in the APAC market, while the growth potential is still substantial. Moreover, regulatory restrictions have been significantly reduced in APAC countries seeking to participate more in global financial markets and with pressure from the institutional investor class in those nations to do so; this makes raising capital in these markets manageable and highly cost effective. For those in the U.S. asset management industry who satisfy the criteria of APAC institutional investors, evolving into a “global asset manager” and raising AUM, can be accelerated by attracting capital from APAC countries. In the final analysis, it seems the right time for these U.S. asset managers to pivot to APAC countries for increasing AUM as an organic and more sustainable growth strategy.