WAVE OF THE FUTURE: HOW ETFS AND OTHER LISTED PRODUCTS ARE POISED TO CHANGE THE APAC INVESTMENT LANDSCAPE - PWC
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Wave of the future: How ETFs at affordable fees? Accordingly, whether achieved through
mobile distribution platforms, robo-advisors, or traditional
and other listed products are asset managers, passive investing is set to greatly increase
access to funds for billions of people across the globe and
poised to change the APAC help lower the costs involved.
investment landscape Within the passive investment product universe,
Exchange Traded Funds (“ETFs”) are likely to play
One of the global trends that PwC sees shaping the Asset
a crucial role in this changing global landscape,
and Wealth Management (“AWM”) industry through to
not least across Asia-Pacific (“APAC”).
2025 is the rise of passive investing.1 As investors challenge
established fee models and demand greater returns
on their investments in their pursuit of alpha, active Global ETF landscape and
and passive managers worldwide will need to respond
accordingly and with increasing rapidity.
APAC focus
As of May 2018, the global ETF market reached AUM of
Indeed, recent research on the fees charged by hedge funds
USD 4.7tr. The majority of this was concentrated in the
indicate that investors only receive 48% of alpha generated,
USA with AUM of USD 3.5tr. Europe and APAC followed
with the rest going towards the hedge fund manager in the
with AUM of USD 0.8tr and USD 0.5tr respectively.
form of fees.2 If even sophisticated institutional investors
Within APAC, Japan holds the largest ETF AUM – USD
are being challenged in determining whether or not they
308bn as of May 2018 – with China and Hong Kong the
are paying for beta masked as alpha and reflected so in the
next two largest markets with ETF AUM of USD 80bn and
fees they pay, what chance do individual investors have of
USD 40bn respectively.3
finding a reasonable return on their investments
1
For further information on the trends PwC sees as shaping the AWM industry globally, please
refer to our report ‘Asset and Wealth Management Revolution’ available here.
2
http://www.allaboutalpha.com/blog/2017/11/27/how-much-of-your-alpha-do-you-pay-away-
to-your-hedge-fund-managers/
3
Morningstar
Chart 1 – APAC ETF AUM breakdown
100% USD 22bn
USD 20bn
90% USD 35bn
80% USD 40bn
70% USD 80bn
Globally, the top three players in the ETF market account
60% for 81.52% of the global market. Despite this dominance
and concentration, there is a very long tail in the global
50% ETF landscape and niche managers can operate in specific
markets or across targeted strategies. Within APAC, the
40% market is a lot more fragmented and local players tend to
dominate their home markets.
30%
Accordingly, the top three players hold approximately 31%
USD 308bn
of APAC ETF AUM, while the top five and top 10 hold 43%
and 57% respectively.4
20%
Idiosyncrasies abound across the region, Japan –
10% with its vastly higher ETF AUM – is home to the top three
ETF managers, while Hong Kong and Singapore have a
0% more international blend of players. The fragmented ETF
landscape across APAC may be a cause or result of the
Japan China Hong Kong Korea relative unpopularity of ETF products as demonstrated by
Australia Rest of APAC the lack of ETF AUM compared to the USA or Europe.
Source: Bloomberg, PwC
Chart 2 – APAC ETF largest funds
80
71.02
70
60
51.85
Only two funds in APAC’s top-10
50 largest ETFs are not managed by
Japanese asset managers
USD (Bn)
40 34.25
31.24
30 26.61
23.20
17.44
20
12.48 12.25
9.11
10
0
Nomura Nomura Daiwa Nikko Listed Nikko Listed Daiwa ETF - Fortune SG Mitsubishi State Street Mitsubishi
TOPIX Nikkei 225 ETF-TOPIX Index Fund Index Fund Nikkei 225 Listed Money MAXIS Tracker Fund MAXIS TOPIX
Exchange Exchange TOPIX 225 Market Fund NIKKEI225 of Hong Kong ETF
Traded Fund Traded Fund ETF
Source: Bloomberg, PwC
4
Ibid.
PwC | 2
This relative unpopularity could be due to several reasons:
• Lack of retail investor attraction – the main users of
ETFs in APAC are institutional investors and individual
investors are estimated to hold less than 15% of ETF
AUM. As regulators across the region embrace robo-
advisory services and become more open to FinTech
solutions, enabling mass-retail investors to have
greater ease of access to a wider range of investment
products, ETFs should be well-positioned to move into
this space.
• Lack of regulatory support – ensuring that regulators
support both ETF product creators and ETF investors
will be crucial to their success. While fund passporting
initiatives are not conducive to listed products,
cross-border programmes like the ETF Connect
Trends among other listed
scheme between China and Hong Kong can grant products
greater access to ETF products to investors and
incentivise ETF product creators to launch new Listed Mutual Funds (“LMFs”), Listed Investment Vehicles
products in the market. Accordingly, we encourage (“LIVs”), or Listed Investment Trusts (“LITs”) as they
regulators to watch the progress of the ETF Connect are sometimes referred to, are closed-ended, pooled
scheme and take steps to adapt similar initiatives investment vehicles which trade on exchanges. Relatively
across the region to build and improve upon it. unknown across APAC – in Australia, there were less than
12 LITs with market capitalisation of circa USD 450million
• Focus on equities among APAC investors – The as of August 2017 – their nature makes them share
overwhelming majority of ETFs across APAC are equity- similarities and differences with ETFs and unit trusts; they
focussed – which mirrors the strong equity focus found nearly always trade at a premium or discount to their net
across APAC investors no matter their level of wealth. tangible assets depending on demand, similar to ETFs, they
Encouraging a greater range of products across the incur brokerage fees, and some LMF managers in Australia
region like fixed-income and thematic ETFs could go have offered ‘loyalty discounts’ to
a long way to reducing this equity obsession, and new existing investors.6
market strategies like Smart Beta, combined with the
overall lower-costs of ETF products, should contribute The year ended 31 December 2017 was described as
to wean APAC investors off their equity ETFs. a watershed moment for LIVs in Australia, with circa
USD 2.9bn raised across 14 listings. Several factors
Despite these factors, sentiment for the future growth are attributed to this surge; a growth in self-directed
prospects of ETF products is high. Previous PwC reports investment flows (namely self-managed superannuation
estimated global ETF AUM would reach USD 7tr by 2021, funds), increased demand for diverse investment
with APAC ETF AUM amounting to USD 560bn. Given strategies that are easy to access, and structural changes to
current growth rates, APAC should surpass that amount distribution channels.
well before 2021 as ETF AUM has more than tripled
since 2012.5
Several innovations have also occurred in the 2
Australian listed investment product space to increase
their attractiveness to investors. Namely: Alignment of interests
– many managers now take
1 direct stakes in the products
they distribute, several provide
Offer costs being borne by the manager
fee rebates if target investment
– breaking from past practice, many
returns are not met, and there
LIV managers absorbed the offer costs
is now a trend to reinvest fees
enabling investors to avoid taking a hit
into the managers’ holdings.
in the value of their holdings on the first
day of trading.
5
PwC ETFs: A roadmap to growth
6
https://www.morningstar.com.au/stocks/article/weighing-listed-investment-trusts/8823
PwC | 3
4
Distribution reinvestment
– several fund managers are providing distribution
discounts – paid by them directly – in order to
encourage fund growth.
3
6
Investor distributions
– some funds now provide explicit target yields and/or Self-directed investment products
distributions for investors. – authorising more investment products would
allow investors to take a more active role in
selecting investments which suit their needs.
5 Such an increase in investor empowerment would
potentially lead to a more engaged investor class
Investor discounts and more sophisticated investors.
– existing investors may be given bonus units in newly-
launched LIVs paid for by the manager. 7
More digital distribution options
– digital distribution platforms are excellent
channels to distribute products like LIVs and ETFs
to individual investors, particularly those in the
mass-retail segment.7
Markets across APAC would benefit from the further
adaptation of LIVs as they would deepen the investment
Major ETF players in APAC
product pool available and encourage local, regional, and As stated earlier, within APAC, the landscape and outlook
global managers to domicile more investment products for the ETF markets across different jurisdictions is varied.
across the region. Japan holds the largest amount of ETFs with approximately
61% of AUM, China accounts for another 16%, and Hong
Another product type gaining prominence are Actively
Kong contains nearly 8% of regional ETF AUM.
Managed Certificates (“AMCs”). These are structured
products whose underlying strategy and components can Japan, APAC’s largest ETF market with over USD 308bn in
be adjusted over the product life at the discretion of the ETF AUM, should not find its position challenged anytime
investment manager. Product performance is tracked by soon, though it is likely to find its dominance greatly
calculating the value of the index the AMC is based off diminished in the coming years as other regional centres
which can be tailored to investor needs.8 grow at faster rates.
The products are typically targeted at HNWIs and private
banking clients and can reflect collective investment
schemes, though they are designed for professional
investors and can avoid being registered with some
APAC regulators.9 Indeed, some global wealth managers 7
https://institutional.anz.com/insight-and-research/ASX-Listed-Investment-Vehicles-are-
Changing-Fast
and private banks in APAC favour AMCs as they can be 8
https://www.caplaw.ch/2015/the-rise-of-actively-managed-certificates/
launched within two weeks and can launch with a lower 9
https://www.theasset.com/wealth-management/33021/why-actively-managed-certificates-
minimum asset size compared to other products.10 may-catch-on-in-asia?id=33021&subm=weath-management
10
https://asianprivatebanker.com/investments/portfolio/dpm/cs-launch-supertrends-mandate-
using-amcs-streets-slow/
PwC | 4
Japan is also home to the largest regional ETF players and With such initiatives, Chinese investors would gain
may look to export their product knowledge across the exposure to ETFs listed in Hong Kong and vice-versa,
region. While the domestic ETF AUM of Japanese managers resulting in Hong Kong’s proportion of ETF AUM across
does not increase at a great pace, their operations in other APAC to rise. Hong Kong also benefits from a permissive
APAC markets may drive regional growth. ETF regime that allows leveraged and inverse ETFs to trade
in the territory.
China’s rise is likely to benefit Hong Kong as an ETF centre
with initiatives like the ETF connect, a cross-border Other APAC players of note include South Korea, Australia,
scheme expected to launch in the second half of 2018. and Taiwan with USD 35bn, USD 20bn, and USD 17bn in
ETF AUM respectively.
Chart 3 - Map of APAC region with ETF AUM by country displayed and percentage of top five funds
Total AUM
USD 80.29bn USD 39.57bn USD 35.05bn
USD 308.25bn
China
South Japan
USD 0.18bn Korea
Hong
Kong
USD 16.52bn
USD 0.47bn Taiwan
Thailand
USD 0.029bn
Vietnam Philippines
USD 0.48bn Malaysia
Singapore
USD 20.20bn
Indonesia
USD 2.28bn
USD 1.49bn
USD 0.45bn
Australia
Source: Bloomberg, PwC
New Zealand
Top-5 ETF Fund AUM %
Australia China Hong Kong Indonesia Japan
36.57% 48.18%
77.16% 73.42% 69.74%
Malaysia New Zealand Philippines* Singapore South Korea
45.71% 35.65%
68.39%
97.79% 100%
Taiwan Thailand Vietnam^
47.62%
*Philippines only has 1 ETF
95.33% 100% ^
Vietnam only has 2 ETFs
PwC | 5
The future for ETFs • China’s MSCI inclusion and continued opening-up
– the inclusion of MSCI A-Shares is likely to lead to
While APAC ETFs may lack the overall AUM of their increased interest in accessing Chinese securities and
American or European peers, their outlook is bright. ETFs can provide a way for investors of all stripes to
Increasing regional wealth at all levels, greater ease of access the growing market. When the ETF Connect is
investing through mobile and FinTech platforms, a stronger launched, global and regional ETF players will have an
desire for diversification of investments, and continuing added incentive to have Hong Kong-listed ETFs in order
developments in promoting cross-border and fund to sell them to Chinese investors who are increasingly
passporting programmes are strong drivers to effect clamouring for overseas investment options.
change and increase the attractiveness of ETFs among
• Continued maturing of defined contribution schemes
APAC individual investors.
– there is a global shift away from defined benefit
Across the region, regulators can help further the pension plans to defined contribution ones and the
development of ETFs in their jurisdictions by several APAC region is no exception with CPF, MPF, Australian
means, including: Superannuation, and New Zealand’s KiwiSaver
schemes all being examples. As these and other
• Promoting or being open to direct methods of product regional retirement schemes mature, they increasingly
distribution through mobile and FinTech platforms; look for ways to lower fees to members and increase
diversification to protect less savvy scheme participants.
• Allow a wide and diverse range of ETF products such as As ETFs fulfil both requirements, we expect to see
leveraged ETFs, inverse ETFs, and other listed products increasing numbers of such retirement schemes adopt
to operate in the market; them which in turn should boost their AUM across the
• Where mandatory occupational defined contribution APAC region.
individual pension schemes exist, allow suitable ETFs • Growing FinTech and online distribution platforms
to be an investment choice for discretionary or default – FinTech, mobile, and other online platforms are
investments as not only do they tend to offer lower breaking down barriers to investing and providing
fees, but diversification is built-in. millions of new and existing investors with access
• Both Singapore’s Central Provident Fund (“CPF”) to products, generally at lower fees than traditional
and Hong Kong’s Mandatory Provident Fund (“MPF”), distribution channels. ETFs and LIVs are good matches
the two territories’ mandatory occupational defined for this new-age distribution model and, as regulators
contribution individual pension schemes, are taking steps across the APAC region grow more permissive in
to lower fees to contributors in order to help safeguard terms of the adaptation of new distribution channels
their retirement savings. Ensuring that suitable ETFs along with ETF and LIV products, can help further
are eligible for contributors would provide CPF and investor empowerment in discretionary and retirement
MPF contributors with access to low-cost, diversified investment schemes.
investment products to aid in their retirement savings. Globally, ETFs have seen huge AUM growth since their
In coming years, we see several key developments as being inception in 1993. Within APAC, their AUM lags against
crucial to the growth of ETF AUM across the APAC region, other areas like the USA and Europe but has high potential
namely: for growth. To help facilitate the expected surge in
regional ETF AUM, regulators across APAC should take
• The ongoing shift from active to passive steps to allow as much access for investors to the products
– the generally lower fees and diversification of ETFs as possible and engage in cross-border programmes which
make them attractive to all individual investors and, as would allow for easier listing requirements of ETFs across
APAC’s wealth continues to increase, this should help the various regulatory jurisdictions.
ETF AUM rise as investors become increasingly assertive
in their choices. Adapting such policies would be beneficial to investors and
the region alike and encourage greater development of the
• Increased distribution access for individual investors AWM industry across APAC.
– as their wealthy clients increasingly demand products
with lower fees and greater diversification, even private
banks are starting to offer ETFs in their product suites.
At the other end of the wealth spectrum, the increasing
number of mobile platforms and FinTech investment
channels are making investment easier for the mass-
retail segment.
PwC | 6
Appendix
Defined as “…a marketable security that tracks an index,
a commodity, bonds, or a basket of assets like an index
fund.”11 ETFs differ from mutual funds as ETFs trade like
equities on an exchange. Accordingly, their price changes
throughout the day and they typically have higher liquidity
and lower fees than mutual funds. These make them
attractive investment options for individual investors,
especially those in the mass-retail segment.
ETFs are generally constructed in the following manner:
Exchange-Traded Fund
What is it?
An ETF, is a fund designed for individual investors that is listed on a stock
exchange. ETFs can own underlying assets like:
Stocks Bonds Gold Oil futures Foreign currencies
Open-ended Pricing Ownership Transfer
An ETF’s outstanding An ETF’s NAV is not ETFs can be bought and
shares can change daily. calculated each day. sold easily through public
exchanges.
Types of ETF History of ETF
• Index 1993 1999 2002 2017
• Actively managed Standard &
Poor’s depository ETFs enter the Bond ETFs Over 5,000 ETFs listed on
• Bond Asian market debut exchanges with total AUM
receipt’s creation
• Commodity (beginning of ETF) in excess of USD 4.7tr
• Industry
• Style International ETFs introduced ETF AUM
ETFs debut in Europe reaches USD
• Inverse
1tr
• Foreign market 1996 2001 2010
• Exhange-traded notes
Pros Cons
• Low/no brokerage commissions • Some ETFs may have wide bid/ask
• Tax benefits spreads
• Liquidity • Tracking errors can occur
• Built-in diversification and wide • Settlement delays
range of products to suit different
investment goals and risk tolerances
11
www.investopedia.com
PwC | 7www.pwc.com/sg
Look out for our next monthly edition of AWM Market Research digest to be
released end-July 2018.
Subscribe to our future research digests at our website here
https://bit.ly/2JiIdms
Contact
Armin Choksey
Partner, Asian Investment Fund Centre & Market Research Centre Leader
PwC Singapore
+ 65 6236 4648
armin.p.choksey@sg.pwc.com
Conal McMahon
Senior Manager, Market Research Centre
PwC Singapore
+65 9678 0331
conal.j.mcmahon@sg.pwc.com
© 2018 PricewaterhouseCoopers LLP. All rights reserved. “PricewaterhouseCoopers” and “PwC” refer to the network of
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