Even the largest firms have ground to cover. For Manulife Asset Management, it is Europe, the Middle East and further into Asia, breaking away from a long-held company strategy of only operating where Manulife has an insurance footprint.
The firm's president and CEO, Kai Sotorp, says that the $300+ billion global asset manager isn't doing it for the adventure. Rather, it is looking to its own business ratio and sees it shifting over time to have greater representation of assets from these regions. "We're just simply responding to that growth," he tells Money Management Executive. "We're foreseeing that China will be the single biggest retirement market in the world."
In an interview, Sotorp discusses the challenges facing asset managers in a future shift to foreign markets.
Why look to foreign markets?
We are in two-thirds of the global economy in terms of where the investment assets originated, and we have been excluding one-third of the world, and that just doesn't make sense.
In Asia we're in 10 markets, but despite the 10 markets we're in, and where we have insurance operations, we never penetrated Australia. It's a competitive market for sure, but it is also a huge investment opportunity. And we're nowhere near Europe and we're nowhere near the Middle East. All of a sudden we woke up and realized that we had close to $5.5 billion from European-based investors because they come to us and we're on databases. We were thinking there must be more opportunity than that.
Is your firm chasing demographics - the economies of scale in developing countries that everyone predicts?
You've got 60% of the world's population in Asia, and [India and China] are about 2 billion, so they're alone to close to 30% of the world.
They are now waking up to the potential of living the way people are living in Europe and the U.S. - they're pursuing their dreams and pressuring their governments - China has been more organized about it than India has been. The one thing that's probably going against India is democracy, strangely enough.
We're just simply responding to that growth. We're foreseeing that China will be the single biggest retirement market in the world. By the end of the year the government will come out with guidelines for an individual retirement structure, and you saw what that did to the U.S. markets.
The 401(k) architecture was sort of the underpinnings of a lot of what's happening with the markets, and the equity of markets, and mutual funds. And you're going to see the same effect in China, so it would be crazy to ignore that.
Europe is a different story. Europe is a well-entrenched, well-defined opportunity set. It's got huge established wealth. It's less about the future of the wealth. It's more that the demographics are shifting to an aging population, and while they have a lot of protection around things like pension systems, they're not out of the woods by any means.
People are not taken care of as well as they think, and even the healthcare systems are going to come under duress in those markets. They're going to recognize that as the necessity of a deccumulation mentality, as they age, and they're going to have a bigger burden than they thought they would. So, we're getting in position for that phenomenon.
We currently are strongly positioned in Asia. We've been at it for a long time. We went into Asia within 10 to 15 years of the founding of the company. We were in China before AIG - everyone thinks AIG was the first foreign company that went in China, but we were there before they were.
So we have $80 billion in the asset management business there. We have 950 people that are across the region, so clearly we are in a way better position to exploit that market.
In Europe we are basically in London. We have a small operation there that is predominately centered around investments. So we have European equity, emerging market equity that's part of our emerging team. But, Europe is also a market that's more accessible as a whole than China or Asia.
China operates independently, Japan independently, Malaysia independently; you want to access Asia, there's no one way to do it.
Europe is much more collectively integrated, so you can actually develop a hub and spoke attack into Europe through London, and you can target major institutions and major markets in a more centric way and you can get the economics working better for you, so that's how we're going to do it. We're going to go through our London base - we just hired a global head of distribution to be based out of Europe. And if you look at what we are, we've got $400 billion in assets, we are in almost every asset class, and we have about 60% of the business out of the U.S., 20% out of Canada and the rest out of Asia.
So we are now tackling the third of the market that we haven't been after.
Do you see that business ratio changing over time?
I do. It's a little hard to predict. Europe and the Middle East are as banked as Asia, the U.S. and Canada are, and we are a relative unknown there.
When I talk about the billions that have come our way, it is the sophisticated institutions that do their database searches and for them they can find the teams and figure out that the teams are owned by the company, and that's how they think.
But, when you get into the retail space, or the mid-tier institutional segment, we are relatively unknown and that is going to take some time to build.
I can't readily predict, but I would say if we can be at $80 billion in Asia with 20% of our assets, we'd be crazy not to target something in the $40 to $80 billion range over time, and we're in for the long haul. This is not a "Dip-your-toe in," this is part of our global plan.
So, I would imagine you would have a more than equal weighting probably - Canada, Europe and then Asia might be slightly higher. The U.S. is going to be a massive engine for us just like it is for any global firm.
And the approach would be the same? Boots on the ground and offices as opposed to partnering with a third party?
We don't partner with people very readily, except for where we absolutely have to. In China we had to. By law you can't get into China any other way.
The same is likely going to have to happen in the Middle East.
Yes, I think so too. So, by definition we are going in it alone. I think that our first target segments will be the large institutional investors - the large public equivalent of pension funds, the sovereign funds, the central banks and then I think we'll target it market by market.
So the U.K. is obviously a market that we're interested in, then countries like the Nordics. In terms of the Middle East, it will probably take a satellite office approach. It's less important to open local asset management arms there.
There it might be more partnering with someone who is local for the global capabilities that we bring. That might be a more realistic way to approach things. In part because we are a bit of a late-comer - it's not like we're the first one penetrating that region.
But for a lot of very well-known firms, any one of the global firms that we compete against, the model is pretty simple and straight forward; they may have satellite office, but they keep their global investment network where it is and then they have London as the hub for that satellite and then it's through that office they provide service.
Then there are the PMs wherever they are and they're accessible and transparently available to the local monies and then if it's going into the second tiers, it's through a partner.
Are UCITS an example of that?
I think in terms of Europe, UCITS are certainly a very effective way to reach into bank distribution and they're all pretty much guided architecture over there compared to what the U.S. looks like. We're going to launch a UCITS platform in the next few months through Dublin as the product achitecture for retail.
When it comes to the Middle East, I think that is more of the targeted institutional approach and may mean partnering with some of the local banks. It's a relatively concentrated set of markets. It's not like you have a huge range of distribution partners that tie out with a huge number of institutional investors you can approach directly.
Do these markets reflect the same kind of evolution that we've seen here in the U.S., where ETFs have become a core instrument in the portfolio, or is there demand for different products?
Well every region or market is different. So Europe, first of all, is more fixed-income and less equity oriented, apart from the U.K. All the Anglo markets look quite similar to one another, but mainland Europe is more oriented toward fixed income.
Europe has been susceptible to passive ETFs, but less so than the U.S., more so than Asia. I know BlackRock feels pretty positive about the continued momentum, but I personally think there's a cyclical aspect to what's happening in the passive versus active.
I think there is a fundamental need for the role of passive, but I think it was enhanced by the crisis that drove down the valuations of markets to such an extent that the beta play just had a lot of merit. And now we're starting to get to richer markets, maybe closer to full valuations. But at that point it becomes harder and harder for the index to deliver in a discernible way relative to active. When fundamentals start reasserting themselves, and valuations start approaching fair value, then you want skill.
Europe didn't quite catch that wave as quickly as the U.S. did and I think the cycle is going to start shifting. If I were to predict, it's not going to gain the same prominence, but it will have a presence.
If you're going to own a piece of everything in the world, you've got to have efficient ways to get in and out of that. So, ETFs in passive have value for people with really large deployable pools of assets and who want to maintain flexibility. UBS launched their ETF platform three years ago, it's $26 billion in assets and it's an example of how Europe is waking up to it, but I'm not sure it's going to have the same penetration rate as the U.S.