Asset management in emerging markets - Roland Berger Strategy ...

Roland Berger Strategy ConsultantscontentFresh thinking for decision makersGo for the middle |Asset managementcan succeed inemerging markets |As long as it providestailored strategiesfor target segmentsJanuary 2012

contentAsset ManagementPROJECTED GROWTH OF THEGLOBAL MIDDLE CLASS2030: 4.92020: 3.22012: 1.8Source : OECDbillionbillionbillion79%69%49%Growing share of middle classin emerging marketsASSET MANAGEMENT IN EMERGING MARKETSEmerging markets around the world are showing themselves to be more than simplyinvestment opportunities for asset managers. With global inflows on the rise, asset managersare turning to emerging markets to tap distribution and sales options and to sourcenew money. The doors for asset managers are opening not just in BRIC countries and theNext Eleven, but also in regions like the Middle East with their impressive growth rates.Double-digit growth is within reach for asset managers in South America, the Middle East,and even in parts of Asia Pacific. But there’s more to market entry than just macroeconomicpotential. Expanding into an emerging market, especially, requires close attention tothat market and its development path, and success depends on approaches and positioningthat are tailored accordingly. It is the fact that these markets are in such flux thatnecessitate substantially robust strategies.A number of qualitative considerations should be factored into an asset manager’s marketentry assessment, the level of basic banking penetration being one of them. The extent towhich a population is already served by financing and investment products is material tothe reach of the entry strategy. Another is the level of investor education, how muchknow-how investors in that market have on their own and other financial markets, andhow sophisticated potential clients are. It is also important to look at the extent of thefinancial market’s liberalization and stability; for example, can asset managers there readilyassess local stock changes, or are there investment restrictions or legal risks to consider?Asset managers should also look for patterns in international outgoing and incomingfinancial flows to determine whether investors are currently allocating money to or withdrawingfunds from the country or region in question. The region’s interest to foreignasset management, the ease of foreign entry, and whether local regulation fosters orhampers new business are also important considerations.TARGETED SEGMENTS, TAILORED STRATEGIESEven more than in an asset manager's home market, success in emerging economiesmeans aligning distribution channels and product offerings with the targeted segments –particularly given the lack of proprietary distribution channels for foreign entrants. Inother words, success entails having a specific "go-to-market" approach. To build such anapproach, players must first assess their current positioning and move to close any gapsin their business models through organic development or strategic partnerships.Emerging markets:Significant growth opportunityfor asset managersAfricaSouth AmericaMiddle EastAPACCompound annual growth rate, 2006 - 2010Source: Roland BergerThe Global Middle Class WILL GROW160%by more thanin the next 25 yearsFor asset managers, tapping into an emerging region or country first and foremost meansisolating the most attractive and approachable client segments. The distribution strategyand product offering can then be aligned accordingly, tailored to segment particularities.While wealthy clients may expect individual coverage and customized solutions, middleand lower segments may respond better to a strong product-push strategy that usesstandardized products.Recent European reports indicate that the top asset managers have incurred more netasset inflows in their top ten funds than in the rest of their portfolios combined. Trends inEurope, in players like Franklin Templeton and Allianz Global Investors, will resonate inemerging regions as well. Independent Financial Advisers (IFAs), for example, will want to

Roland Berger Strategy ConsultantscontentAsset ManagementMAJOR potential leverage7%=33%GDPGlobalsovereignwealthMiddle Eastern countries currently accountfor one-third of the sovereign wealth of theentire globe, though they account for lessthan 7% of global GDPsee large and well-known flagship funds that they can sell to their clients. Solid expertiseand sufficient scale will underpin an asset manager's ability to secure such resources.To illustrate the necessity for alignment between segments and strategies, let’s take alook at the general retail middle market. This segment prefers face-to-face interaction andadvisor-based channels. To service the retail middle market, an asset manager needsaccess to an established distribution footprint. This could be through a traditional brickand-mortarretail branch network or via an IFA. Product offerings must leverage themarket's opportunities without alienating investors or running up costs. Asset managerstargeting the average retail middle market have to keep in mind that simple one-ticket productsmake for a high level of automation, that the advice required is low-frequency andlow-depth, and that the customization options are few.The fluctuating character of emerging economies insists that strategies be tailored to thesegments they target, perhaps to an even larger degree than many asset managers areaccustomed to. The case of middle markets in the Middle East illustrates this correlation,and how asset managers can succeed in its midst.THE CASE OF MIDDLE MARKETS IN THE MIDDLE EASTThe Middle East is opening up, but not in the way commonly assumed. Surprisingly, thevast pools of institutional wealth and the super rich should not be the targets of assetmanagers; rather, the real opportunities lie in the middle market. Similar trends can beobserved elsewhere in other emerging economies like Asia. As the petrodollars haveaccumulated, the Middle East has enjoyed large pools of institutional wealth. MiddleEastern countries currently account for one-third of the sovereign wealth of the entireglobe, though they account for less than 7% of global GDP. But accessing these assetpools is no easy task. Sovereign Wealth Funds (SWFs) are the most prominent state-ownedinvestment vehicles in the region, and they typically manage a substantial part of theirassets in-house. SWFs are highly sophisticated investors, so asset managers would haveto prove long, successful track records and advanced internal processes before they caneven hope to be shortlisted. SWFs, furthermore, prefer global diversification over regionalinvestment. Getting anywhere near them will be an uphill battle for an asset managerentering the region.The super rich in the Middle East, its high net worth individuals (HNWIs), control 4% ofglobal private wealth. In absolute terms this equals roughly USD 1.5 trillion – no negligiblefigure. But they tend to invest their wealth offshore in private banking hubs likeSwitzerland or Singapore, which means, again, asset managers will be hard pressed to gainaccess to their funds. In the Middle East, in reality, it is the middle market that holds themost potential for asset managers. Out of a total of 24.2 million adults, 7.0 m or 29% makeup the middle market across the affluent, mass affluent and upper mass income segments.The upper mass segment is the most sizeable segment of the middle market, witha bankable population of 3.9 million, investable assets between USD 20,000 and 100,000,and representing a potential asset pool of at least USD 78 billion. But the most attractivemiddle market segment in the Middle East is the mass affluent segment. With 2.5 millionadults holding investable assets between USD 500,000 to to 1 million, this segment representsa potential total wallet of USD 1.25 trillion or more. In other words, the middle marketin the Middle East rivals the super rich in terms of asset management potential. The longheldassumption that most wealth in the region is concentrated with the HNWIs is clearlydebatable. The Middle East illustrates how today's asset managers can succeed in anemerging market – in this case, in the middle market. Our own experience and analysesmake it clear that the successful business models in this region and market entail differentblends of insourced and outsourced asset management activities. A framework of existingbusiness models allows us to categorize asset management players according to their currentpositioning – and thus to suggest next steps for successful middle market entry, inthe Middle East or elsewhere. Asset managers eyeing the region must look to their availabledistribution and investment expertise first. Knowing where one stands is the first steptowards a solid business model – and ultimately towards growth.1 – Established Middle Eastern banks without an asset management franchiseWith renowned brands and established brick-and-mortar branch networks, most retailbanks in the Middle East are likely to already have a banking relationship with the middlemarket and its most attractive segments.Due to long-established reliance on bank deposits and savings accounts, most retailbanks have not pursued asset management. But rising levels of investor education anddeveloping capital markets have made Middle Eastern banks increasingly interested indiversifying their revenue streams via asset management. To leverage this opportunity,banks can opt to either partner with a renowned asset management brand in retail ororganically develop an asset management operation from scratch. In either case, banksneed to provide a compelling value proposition to retail investors. To start, the retail bankingbrand should be perceived as trustworthy. To achieve this, banks should either be ableto capitalize on a long-standing history in retail banking or should consider specific measuresto be perceived as a credible advisor. The bank should also have an established retailbranch network so that it can do its business face-to-face. Online channels are on the rise,but for a new entrant this should be seen as an "add-on" rather than a standalone strategy.Product push is still too difficult in the region. In the same vein, simple and easy to understandinvestment solutions should be offered that can reach the varying levels of informedinvestors across the Middle East. Customers must first get used to investing in funds, sostarting with a basic and easy-to-understand product range will facilitate this learningcurve. This also means that the bank should have a solid track record and investmentexperience. Investors are often insecure about the "right" investment, so banks and assetmanagers need to alleviate their target customers' concerns from the outset. Building atrack record, however, obviously requires several years; partnering with establishedplayers might be a valuable option while a bank is building its own reputation.Finally, the asset manager and banking sales incentives for retail advisors should bealigned. From an asset manager’s perspective, what matters are not only high inflows ata specific point in time but also, and perhaps even more so, asset under managementTrillion to spend125000000000000USDIn the Middle East, it is the middle marketthat holds the most potentialEstablished banks/no assetmanagement franchiseEstablished Brand& Distribution1 32 4Investment Expertise

Roland Berger Strategy ConsultantscontentAsset ManagementNew entrant banks startfrom scratchEstablished Brand& DistributionEstablished asset managersshould focus on a tailoredofferingEstablished Brand& Distribution1 32 4Investment Expertise1 32 4Investment Expertiseretention over time. This means that asset managers must not only aim to maximize theirinflows but also to keep the assets in-house over time and avoid attrition (i.e. outflows) sothat they can earn management fees over the long term. Retail sales advisors, therefore,should be incentivized to foster client loyalty and avoid attrition.2 – New entrant banks or Independent Financial Advisers (IFAs)With little or no brand recognition, no distribution network nor proven investment expertise,new entrants can tap asset management opportunities by first either developing theirbrands/distribution or their investment expertise.In the first scenario, new entrants to the Middle East can distribute third-party productsthrough commission-based platforms or white-label distribution agreements in order todevelop their distribution and brand positioning. A well-defined and fairly focused valueproposition for each segment will lure new clients away from existing players. Since mostretail onshore assets under management in the Middle East are currently held in captivebank-owned funds and other products, clients can represent more value through a focusedoffering. Banks should also be able to provide access to key flagship funds from renownedasset managers. Most retail banking clients in the region are restricted to owning theirbank's funds, so offering access to well-known regional and global flagship funds wouldprovide investors with a best-in-class offering from a single provider. Attractive launchpromotions or price discounts will also be helpful. With current distribution margins athigher levels than in developed markets, Middle Eastern new entrants can afford to provideattractive financial incentives to lure new clients. In any case, the asset managementplatform should be seamlessly interwoven with the rest of the customer offering.Operational efficiency will be key to maximizing sales. Organizations which are able tointegrate their asset management platform within their current e-platform will be bestpositioned to take advantage of direct/e-banking as it gains a hold across the Middle East.The second scenario calls for in-house investment expertise. Entrants can either acquireor build an investment team through targeted hiring. The key is an ability to attract andretain outstanding investment talent. This may be trickier in the Middle East, where thelocation of the investment team will play a critical role in a firm's ability to attract the rightpeople. Along with location, a well-defined compensation structure and long-term incentiveschemes will be what attracts and retains an investment team. Staying in the market –with the consistency of a strong team – is what will build a track record that can later competehead-to-head with existing players. As with other growing markets, entrants need toview their entrance as a long-term, sustained investment.3 – Established incumbent asset managersEstablished asset managers need to reinforce their existing value proposition to fend offnew entrants. They can achieve this by either building significant scale or by further deepeningtheir investment expertise in certain investment areas. Building scale involves anumber of measures. A broad and well-established distribution network, potentially using amix of captive and third-party channels, can reach large numbers of potential clients witheasy and convenient products. But rather than trying to compete with a "one size fits all"approach, a tailored offering should be available for more wealthy and demanding clients,and standard offerings kept to the lower tiers of the middle market segment. Furthermore,critical mass in assets under management will allow asset managers to lower operatingfees and better compete on pricing. When a player reaches a certain scale, it can lower unitcosts and even potentially pass on some cost advantages to retail investors or third-partydistribution channels, if and when needed. To further leverage scale, managers should alsoseek out optimization options for middle and back office operations and processes. A properlyincentivized sales force will further support asset retention. This might include notonly upfront commission schemes but deferred compensation schemes based on assetsunder management levels and net flows over time.Deepening investment expertise, in the case of incumbents, first implies assessing theexpertise currently available, and then the areas for improvement. Implementation of thesubsequent changes should be documented and shared with clients, which will lead toproactive marketing of the new or improved expertise range. Next, the compensation structurein the front office should be competitive. This means an employee value proposition,attractive remuneration packages that reward outperformers, and clear developmentpaths for "superstars". Performance-based incentives for the front office staff and the firmas a whole should be aligned. And finally, the asset manager should have a proven and sufficienttrack record of adding value. This must be built up over time. Initially, upfront investmentswill have to be made, and payback will be in the mid-term. The asset manager thereforeneeds a "stay the course" attitude.4 – Leading global asset managersMultinational asset managers looking to enter the Middle Eastern retail market can offerinvestors trusted and proven products that are managed by world-class investmentmanagers with long-term track records. However, their expansion of products and salesactivities in the region should be gradual, and such players should avoid the temptation tobuild a fully-fledged branch network or local middle or back offices. Such moves would notonly be costly; they would reduce economies of scale and thus potentially lead to largeproblems down the line. Leading global asset managers should therefore focus on a selectnumber of flagship products with sufficient margins, offer local variations (e.g. Shariacompliantvariations), partner with renowned retail brands and distribution networks, andprovide on-the-ground sales training and support.EMERGING MARKETS, EMERGING CHANCESThe Middle East is one of several attractive and emerging markets that asset managerscan tap for expansion opportunities. As with any market entry, success relies on welldefinedgo-to-market strategies that address local specifics. The flux of these emergingmarkets, especially given their lack of proprietary distribution channels for foreignentrants, demands airtight alignment between the targeted segments and the assetmanager’s own distribution channels and product offerings. With properly aligned businessmodels and entry strategies, asset managers can seize the new distribution and salesopportunities arising in these emerging economies. The Middle East is an apt model forasset managers looking at expansion, especially beyond the traditional asset geographies.Leading global asset managersshould expand activities graduallyEstablished Brand& Distribution1 32 4Investment ExpertiseIF YOU HAVE ANY QUESTIONS,PLEASE FEEL FREE TO CONTACT US:Dr. Frank Heideloff, Partner+49 40 37631 - 4448frank_heideloff@de.rolandberger.comMatthias Hübner, Principal+49 89 9230 - 8910matthias_huebner@de.rolandberger.comJoe Nakhle, Project Manager+973 17 567 - 994joe_nakhle@bh.rolandberger.comthink:act CONTENT…ditors:Prof. Dr. Burkhard Schwenker, Dr. Martin C. WittigProject management: Dr. Katherine NöllingDesign: Roland Berger Media DesignRoland Berger Strategy Consultants GmbHAm Sandtorkai 4120457 Hamburg+49 40 37631-4421news@rolandberger.comwww.think-act.info

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