State Street : Asia-Pacific Asset Managers Revamp Strategies to Tap Opportunities from Potential Rate Hike

"A rising market creates opportunities on multiple fronts for asset managers that are agile enough to seize them."

by State Street Corporation (NYSE: STT) asset managers in Asia Pacific (APAC) are optimistic about profitable growth and are revamping their business strategies to better catch the new wave of opportunities in the first year of a rising interest rate environment.

Asset managers are upgrading their capabilities and hunting for acquisitions that could extend their expertise or reach. State Street's report titled, "Opportunities for Optimism? A New Vision for Value in Asset Management" was conducted by FT Remark and surveyed 400 asset managers, including 125 from APAC.

Making the adjustments for growth

State Street's report shows that APAC-based asset managers are also taking steps to adjust their allocations in the first year of a rising interest rate environment. Nearly two-thirds (62 percent) of APAC-based respondents say they will expand their offering of fixed income alternative strategies to meet heightened investor demand.

More than half (57 percent) will increase use of derivatives to hedge against interest rate risk and 45 percent will increase the use of floating-rate debt securities. Nearly a third (31 percent) will shorten the duration across their bond portfolio.

"Asset managers are playing for high stakes," said Paul Khoury, senior vice president and head of sector solutions for asset managers in APAC at State Street. "A rising market creates opportunities on multiple fronts for asset managers that are agile enough to seize them."

Eighty-four percent of respondents in APAC see increased opportunity for profitable growth in the next 12 months and 42 percent are "highly confident" of their ability to allocate capital to areas that will generate the most value. They also see increased opportunity for acquisitions, to enhance operational efficiency, expand distribution and enter new markets.

Creating value for clients

In APAC, new opportunities are emerging as regulators create frameworks for cross-border initiatives to increase the overall funds flow into the region.

Initiatives such as the Mainland China-Hong Kong Mutual Recognition of Funds programme and the Collective Investment Schemes by the Association of Southeast Asian Nations give asset managers greater access to the region's savings pools and help them achieve higher economies of scale. In addition, the eventual inclusion of China's A-shares into the MSCI global benchmarks, will lead to greater market accessibility for global investors into the world's second largest economy.

APAC-based asset managers are improving their distribution networks and operational capabilities to support these new opportunities.

Sixty percent of APAC-based respondents plan to expand their existing distribution network to tap growing flows while nearly half (48 percent) say that they are accessing new distribution channels. A similar 48 percent of APAC-based respondents are evaluating targets for acquisitions.

Tackling the threats

Despite the positive outlook, asset managers face rising cost pressures. Only 2 percent of APAC-based asset managers feel no pressure to reduce costs in their overall business. Sixty-eight percent APAC-based asset managers say that their cost of distribution will increase over the next five years.

At the same time, they face new competitive pressures - 82 percent of respondents say they will face direct competition from non-traditional market entrants such as technology companies that use their online and mobile platforms to offer money market funds.

As more clients move in-house and become more hands-on with their portfolios, they want more personalization of services from asset managers to help them manage their money. Nearly three quarters of asset managers in APAC (71 percent) say that a greater proportion of client assets will move to bespoke solutions over the next five years.

Asset managers are also investing in new talent and capabilities. In APAC, 45 percent of respondents say that they are recruiting new talent in business development roles as asset managers tap the growth opportunities and to make the connections between effectiveness of products, investment strategies and business direction.

"Asset managers see opportunities ahead," said Khoury, who is also head of State Street Global Services for Australia and New Zealand. "But they will need to demonstrate where and how they create enduring value for their clients to achieve long-term success."

About State Street Corporation

State Street Corporation (NYSE: STT) is one of the world's leading provider of financial services to institutional investors including investment servicing, investment management and investment research and trading. With $28.7 trillion in assets under custody and administration and $2.4 trillion* in assets under management as of June 30, 2015, State Street operates in more than 100 geographic markets worldwide, including the US, Canada, Europe, the Middle East and Asia. For more information, visit State Street's web site at www.statestreet.com.