Hong Kong’s investment management industry sees increased opportunities from Mainland China, an aging population and MPF reforms, however intensifying competition, regulations and talent shortage pose challenges, according to a joint report by KPMG and the Hong Kong Investment Funds Association (HKIFA).
The new report – Vision 2020: The Future of Hong Kong’s Fund Management Industry – includes in-depth insights from key industry executives and finds that Hong Kong is expected to retain its position as Asia’s leading asset management hub in five years’ time.
With the launch of the Shanghai-Hong Kong Stock Connect and Mainland-Hong Kong Mutual Recognition of Funds, most fund management firms interviewed said they expect mainland China to account for a greater proportion of their customer base and assets under management in the next five years.
The report also highlights the risks that Hong Kong needs to tackle: it remains primarily an importer and distributor, rather than a manufacturer, of fund products; most funds are still domiciled offshore. There are also signs of strain in areas such as the talent pool, regulations and the cost of doing business, driven primarily by high rental cost and compensation.
Vivian Chui, Partner, Investment Management, KPMG China, says: “While Hong Kong remains as a preferred gateway to Mainland China and the region, the investment professionals consulted all agreed that Hong Kong cannot afford to rest on its laurels. The exclusivity of the access Hong Kong enjoys to Mainland China may be tempered in future, Shanghai and Singapore are also grooming their own financial hubs. In addition the industry and consumers are likely to face more scrutiny from regulators and compliance-related costs are likely to rise.”
Fund managers interviewed said they expect increased coordination and policy development between Hong Kong and Mainland regulators will drive the industry’s growth. However capitalising on and maintaining that advantage is key, as the schemes increasing Hong Kong’s access to the Mainland may be expanded to other markets, perhaps encouraging the development of alternative hubs.
Terry Pan, Chairman, HKIFA, says: “Hong Kong will not be the exclusive entry point into Mainland China five years from now. People might go straight there. It is opening up and despite a lot of uncertainties, there might be a lot of advantages to an asset manager not necessarily having to go through Hong Kong anymore. There are still a lot of things going for Hong Kong and it will continue to grow, no doubt about that. But if we want to maintain our position there are a lot of things that need to go right.”
The report highlights that regardless of developments in its relations with the Mainland, Hong Kong must continue to measure itself against other fund management centres regionally and globally, and boost its links with other markets, including bilateral relationships and fund passporting initiatives.
A rapidly aging population will boost demand for investment options and higher returns to support longer retirement, and MPF reforms will offer substantial opportunity for the industry. Talent shortages, however, are expected across all functions, particularly legal and compliance. A wave of Mainland firms that have set up in Hong Kong are now also competing for the limited number of professions, particularly under the Mainland-Hong Kong Mutual Recognition of Funds scheme.
Pan adds: “Many companies are attempting to address the talent shortfall by redeploying staff from other divisions, training people for new roles, or redoubling efforts to hire externally. But many funds also emphasise bridging talent gaps requires a longer-term strategy, supported by government, that has as much to do with culture and education as numbers.”
Another challenge facing the sector is to catch up with e-channels. Fund distribution is currently confined mostly to intermediaries. Electronic channels offer a new, highly efficient and easily scalable way to market and sell to customers that could also drive down costs for the end investor. Regulations need to be updated to give firms more free rein to cater to changing consumers preferences via emerging technology platforms.
Chui concludes: “Retail fund managers are seen having an important role to play in informing this shift. Also prevalent is the belief that further integration with the Mainland will inevitably hasten the adoption of technology in Hong Kong, as local funds strive to cater to new customers who are used to managing investments on their mobiles, and institutions and regulators on both sides are required to share more information. Failure to adapt could risk Hong Kong’s position as a financial centre.”
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About Hong Kong Investment Funds Association
The Hong Kong Investment Funds Association (“HKIFA”) is a non-profit-making industry body that represents the fund management industry of Hong Kong.
To achieve these objectives, HKIFA has two key roles, namely consultation and education. On consultation, HKIFA maintains close dialogues with the regulators/authorities as well as other stakeholder groups. It represents its Members and the fund management industry generally with respect to the regulation of unit trusts, mutual funds and other funds of a similar nature, as well as pensions funds and other institutional funds. Another very important task is to educate the public about the role of investment funds in retirement planning and other aspects of personal financial planning.
The HKIFA has four categories of members, namely full member, overseas member, affiliate member and associate member. As at September 2015, HKIFA has 65 fund management companies as full/overseas members, managing about 1,170 SFC-authorized funds. Assets under management were at about US$970 billion. In addition, it has 63 affiliate and associate members.
The Association is incorporated as a company limited by guarantee.
Vision 2020: The Future of Hong Kong’s Fund Management Industry is published by KPMG in association with the HKIFA.