ING Grows Assets Using a ‘New World’ Approach In Asia-Pacific Investment Management Business

Originally published January 7, 2008 

Financial firms in the US and Europe are witnessing the rapid growth of the Asia-Pacific markets and looking to plant stakes in the region. With China and India in particular becoming global financial powerhouses, Western firms are trying to overcome differences in the business culture and operations practices to succeed in the region. Operating with a smaller staff than other regional units of ING Investment Management, ING’s Asia-Pacific division, with $150 billion in assets under management, has reported growth of $30 billion AUM over the past 12 months. ING Investment Management invests in all Asian credit markets, currencies, derivatives, structured products, real estate securities and direct real estate business. The asset management firm tries to take a ‘new world’ approach to its activities in Asia. Global Investment Technology spoke with Chris Ryan, Chief Executive, Asia-Pacific, ING Investment Management.

GIT: What are some of the key trends shaping the asset management business in Asia?

CR: First is the movement of capital from West to East. Secondly, rapid economic growth is creating three particular things: first, an investing middle class; a demand for pension funds for retirement; and more rapid development of regulations. Another key trend is bank-based distribution of mutual funds, which is just exploding, replacing direct distribution of funds. In most countries, bank-based distribution is about 85 to 90 percent of total distribution. In many countries, regulation did not originally permit banks to distribute funds. With bank-based distribution, it’s a consolidated distribution chain for the consumer. Everyone goes to the bank, and one way or another, funds are introduced to them. That’s not better or worse, it’s just different. It means the distribution systems are evolving differently from Western countries.

GIT: What are your biggest challenges as chief executive officer for Asia-Pacific of a leading global asset management firm?

CR: If the industry had more experienced people than it does today, it would grow faster. That’s the major constraint for every player. We need commitment to training and development. In recent years, to supplement our recruitment of experienced people, ING has been recruiting from the Indian Institute of Management, as well as Beijing University, and universities in the Philippines. We need to bring them in young, spend three years educating them and then put them into the business. At the other end, senior and experienced management talent is difficult to find. It’s also surprisingly hard to import from Western countries, for a number of demographic reasons. Experienced managers often have children in school, social networks and a good life in their home country. You can find returning expatriates – Indians who have been in the US or the UK for 10 years who are willing to go back now, but weren’t willing five years ago. You can find Filipinos who have been working in the US. But there’s still a limited supply of them.

It’s a constant battle for talent. For someone starting up a new organization or trying to expand rapidly in Asia, that’s a major constraint. You have to calibrate growth plans around the people that you can attract to the business. Difficulties in outsourcing exacerbate the people problem. Operations people may not always be exposed to trading in foreign securities. That requires time and a lot of training. If, for example, we are launching a global real estate fund, sub-advised in New York but settled in India, we have to find people in India whom we can teach how global real estate securities work. They must know how to handle a failed trade, how to follow up on it and whom to call.

GIT: How does the IT support environment differ in Asia from the US and Europe?

CR: The main challenge is multiple currencies and multiple languages. China, Japan, Korea, Thailand and other places all require double-byte characters that have more strokes in each letter space than Western characters. Western systems aren’t built for these double-byte characters, and require a relatively major modification to handle them. Double-byte characters could be built in HTML, but HTML cannot be easily superimposed over older systems.

More broadly, the US and other mature markets operate with an ‘old world’ way of thinking, while Asian countries have a ‘new world’ way of thinking. The ‘old world’ way is when a corporation thinks they’re simplifying things for the customer by reducing costs, but does so without thinking about what the customer wants. ‘New world’ thinking is customer focused, like Tata Motors developing the $2,500 car in India. When entering Asian markets, Western firms should think about how to expand what each of these local markets does rather than just putting those countries’ customers into their systems, which can lose a lot of the flexibility the local businesses have.

Also, trading systems and standards vary. That’s mostly an issue in China, but there are other issues in other countries. China operates on a virtual real-time settlement basis, so you can’t have a failed trade. You really know whether your trade has settled or not, because they leapfrogged and started on a paperless system. So while we’re all focusing on getting to T+1 or STP, they have STP. They started with it. When we serve Chinese funds investing abroad, they say, ‘What you’re asking us to do is less efficient. Why?’ T+1 or T+2 sounds like a joke to them. They ask why there’s this risk in the system. We’re used to failed trades and know what to do with them, but to them it’s like buying a car and saying, ‘This car is just the same, except occasionally one of the wheels will fall off … without warning.’

GIT: What is the state of direct market access and electronic trading in the Asia-Pacific region?

CR: In most cases, there is remote direct market access available. It varies by country, but for a large proportion of trades you can do that. There are issues in the fixed-income markets. Illiquidity issues pop up more often in Asia because turnover is lower relative to the market size and the credit markets aren’t as efficient, so pricing of fixed-income securities to value a portfolio can be manual. Sometimes you have to encourage a broker to price something they weren’t before, so there’s enough triangulation in the pricing.

GIT: Can you describe ING Asset Management’s Asia-Pacific operations?

CR: Broadly, we use three main systems. In the front office, we’re moving toward Charles River, and I think we have Charles River in more locations than anyone else. We are moving away from Bloomberg PTS, which doesn’t provide the pre- and post-trade compliance that we need to meet our global standards. Charles River is still undergoing development and doesn’t cover all the securities we need, particularly on the fixed-income side. That’s as much a global issue as it is an Asian issue, but it actually does a pretty good job on the equities side. Middle office at the moment is Thomson Financial’s PORTIA system, which we use in a number of locations. We also use DST HiPortfolio in several locations. We use two systems because of historical reasons.

Both have their advantages and disadvantages, and both are reasonably well supported across Asia. We still think we should be outsourcing more. No matter how big we are, we still will be sub-scale in managing that kind of technology efficiently. We use Omgeo and other trade-support services. We use global standard systems to connect as much as we can. We don’t run things on spreadsheets, unless there’s no other way. Everyone runs some spreadsheets somewhere, but we’ve minimized the use and maximized the use of applications that have global standards.

GIT: Are custodians meeting the needs of asset managers in the Asia-Pacific region? To what extent does ING utilize outsourcing?

CR: Performance measurement and attribution is a big gap. They either don’t do it or don’t do it well. In mature markets, custodians are offering that kind of service. It’s in very few markets and if they do have it, they’re not doing it with sufficient conviction. We’re happy to pay for it and I’m sure many of our competitors would, too. We use Thomson PORTIA for performance measurement and risk reporting because there’s no one else who can take it on. Everyone tells us they want to partner with us on it, but it’s a big bite. If they don’t believe that one-third of global assets will be in Asia in 10 years, then they may not make the investment that’s required to get this done. No one is obviously stepping up to do that at the present moment.

GIT: Rudyard Kipling claimed East is East and West is West and never the twain shall meet. What are the prospects for marketplace convergence, at least in asset management and securities trading practices?

CR: Kipling meant that if you think like the West in the East, you will fail. The opposite is also true. If you’re going to operate in the East, you need to think like the East. Kipling didn’t mean that they wouldn’t touch each other. He meant if you think from a Western perspective in the East, you will become frustrated and won’t succeed. That’s absolutely correct. That’s thinking about the customer. The customers are in the East. They aren’t budding American, Australian or English consumers. They’re Chinese, Vietnamese or Koreans. It doesn’t mean you have to re-design everything, but it does mean that you have to start from what’s important there and maybe take a different business strategy to solve the problem.

GIT: Has any custodian been able to accommodate all Asia-Pacific countries on one platform?

CR: No one else has. We’re an asset manager and are in all these markets and had to do it. I don’t think it’s that hard. It can’t be that difficult, because we do it in all these locations. From a global custody point of view, we want to see greater coverage, better quality relationship management in these countries – it varies a lot; a better measurement and attribution analysis right across the regions; and the ability to outsource more of our operations, even portfolio accounting and things we can’t necessarily do. When we can, it’s very expensive. Portfolio accounting is the big opportunity as the industry grows.

   
     

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