|The Bahamas Investor Magazine
January 20, 2012
January 20, 2012
Over recent years, many members of the world’s wealth management community have been setting their sights on Asia as a growing number of high-net-worth individuals (HNWIs) across the Asia-Pacific (A-Pac) region look to expand their portfolios.
As investors in the west have been plunged into a period of wealth preservation rather than wealth accumulation, in the Asia-Pacific region, the newly wealthy are enjoying an economic boom that is swelling their coffers.
The global HNWI population remains highly concentrated in the US, Japan and Germany, which together accounted for 53 per cent of the world’s HNWIs in 2010, according to the 15th annual World Wealth Report, released in June last year by Merrill Lynch Global Wealth Management and consulting, technology and outsourcing giant Capgemini. However, the Asia-Pacific area posted the strongest regional rate of HNWI population growth in 2010 among the top three markets. While HNWI wealth had already overtaken Europe in 2009, Asia-Pacific has now surpassed Europe in terms of HNWI population, expanding 9.7 per cent to 3.3 million, while Europe grew 6.3 per cent to 3.1 million (see Figure 1).
Asia-Pacific HNWIs’ wealth gained 12.1 per cent to $10.8 trillion in 2010 (see Figure 2), exceeding Europe’s HNWI wealth of $10.2 trillion, where the wealth increase was 7.2 per cent in 2010. Asia-Pacific is now the second largest region for both HNWI wealth and population, second only to North America.
“While over half of the global HNWI population still resides in the top three countries, the concentration of HNWIs is fragmenting very gradually over time,” says Karthikeyan Rajendran, sales director, Middle East, global financial services at Capgemini. “The concentration of HNWIs among these areas will continue to erode if the HNWI populations of emerging and developing markets continue to grow faster than those of developed markets.”
The fifth annual Asia-Pacific Wealth Report 2010, also produced by Merrill Lynch and Capgemini, noted that ultra-HNWIs, or individuals with investable assets of at least $30 million, rose 36.7 per cent to 19,600 in the region, while ultra-HNWI wealth jumped 42.6 per cent in 2009.
These statistics present a very attractive opportunity for asset managers. The A-Pac region consists of 12 core markets: Australia, China, Hong Kong, India, Indonesia, Japan, Malaysia, New Zealand, Singapore, South Korea, Taiwan and Thailand. These markets together account for 95 per cent of the region’s gross domestic product (see Figure 3). Leading the foray into the region are the big Swiss investment banks such as UBS and Credit Suisse, which have been beefing up operations across Asia. Credit Suisse hired 60 new relationship managers in Asia in 2010, while UBS now has a regional footprint in eight different cities in the region including Auckland, Hong Kong, Shanghai, Sydney and Tokyo. Smaller boutique private banks such as Pictet are targeting ultra-HNW discretionary clients, bolstering Asian investments, with equities underpinning the portfolio mix.
However, the Swiss are not the only ones eyeing the rapidly expanding Asian market. Canada’s Scotiabank is also pursuing a strategy of thorough reconnaissance in the region.
“It is an extremely diverse region; these countries are hugely different,” says Warren Jestin, Scotiabank’s chief economist. “The only central factor is that people are getting richer. New money is looking for portfolio diversification outside of their economies.”
This may be the case, but there remain significant barriers to managing that wealth for providers outside of the region.
“Succeeding in the region really involves making the right contacts and finding a partner in the economy,” continues Jestin. “Firstly, you have to do an assessment as to whether it is worth marketing there and then build on that relationship. Scotiabank is in more than 50 countries around the world and every time we have gone into a country it has involved finding a partner in that market and expanding with them over time.”
A-Pac investor strategies
Once you have decided which countries within the region offer the most potential, you then have to decide what product or service would be most effective. Asia-Pacific HNWI investors ended 2009 with 27 per cent of their assets in equities and 26 per cent in real estate, both up from the previous year where crisis-driven flight increased the allocation to cash-based instruments.
HNWIs in Asia-Pacific remained primarily invested in their home regions in 2009, though the proportion invested outside the region rose to 36 per cent up from 33 per cent the previous year.
Wealthy individuals in the region, excluding Japan, also continued to pursue returns in real estate, which accounted for 31 per cent of their aggregate portfolio at the end of 2010, up from 28 per cent a year earlier and far above the 19 per cent global average.
Money also flowed into the region, with investments in emerging markets providing opportunities for HNWIs in search of profit. In the first 11 months of 2010, according to the Merrill Lynch/Capgemini report, investors poured record amounts into emerging market stock and bond funds before selling to capture profits as the year ended and after the value of many emerging market investments topped pre-crisis highs.
“In Asia, there is a myriad of service providers available and people choose them in a variety of ways,” says Joseph Field, senior residential partner, Asia at Withers wealth advisors. “We tend to work with banks, but also with family offices and they are as diverse a group as you see in North America. What is interesting is that there is a bias toward corporate investment, which have tended to fare far better in the recession than others, and the concept of ‘liquidity events’ is almost unknown.”
Trends of this nature highlight the need for a valued partner that is keenly attuned to the nuances of the culture and the market. The danger is that large amounts of time, effort and resources may be poured into strategies that are never going to return on investment.
Conversely, without the right advice, you could entirely overlook large areas of the market that have massive untapped potential. Field explains: “Estate planning, for example, is a complex subject in Asia. Chinese culture has a fear of death and estate planning is seen as tempting the fates. However, in the past few years, taxation and the size of estates has required people to give this much more serious consideration. Also, many of the Asian countries have a civil law system and others use Sharia for regulation of family matters. It is important to pay attention to detail.”
Jestin at Scotiabank agrees. “You have to research and find a niche, because there are so many countries and they are so different that you could go bankrupt marketing to Asia following a broad-based strategy,” he says. “You have to find out where the affiliation is.”
The Bahamas position
So, is it possible that The Bahamas can tap into this undeniably large, but equally complex market? There are a number of basic factors such as time difference, geographic distance and language barriers that present fundamental challenges to doing business. There is also keen competition from jurisdictions that are both more culturally and geographically aligned with the region, namely Singapore and Hong Kong.
However, in principle there is no reason why a jurisdiction such as The Bahamas cannot carve itself a niche in the market, particularly if providers set up local offices and start building contacts. “The term ‘offshore’ has no stigma attached to it in Asia,” explains Field. “Asians use offshore jurisdictions a lot, primarily for companies. The term ‘BVI’ [British Virgin Islands] is almost generic for an offshore company. Many Asian tax systems are territorial and there is little in the way of death duties. The BVI, Jersey and the Cayman Islands are frequent visitors and their corporate and trust industries are very well known.”
However, competing with such well-established service providers in their specialist areas may prove to be unrealistic and Field goes on to suggest that The Bahamas needs to play to its particular strengths to win a share. “The Bahamas’ strengths in the maritime arena and residential possibilities, I would think, would be of great interest to an Asian investor; particularly given your proximity to the US and Canada.”
Moreover, a continued desire by HNWIs in the Asia-Pacific region to diversify portfolio allocation can only serve to benefit The Bahamas, as investors travel more and look to a wider array of ventures in which to put their money. “More A-Pac countries are spending more dollar for dollar abroad and they are also investing more overseas,” says Jestin. “In the next three to five years I think you will see more investors from emerging economies looking for alternatives to treasuries, bills and bonds–increasing asset diversification with investment in real estate, indirect and direct participation in tourism projects.”
It matters not how good your products and services are, or the potential for investment that you possess, if no one has heard of you. “The problem is that The Bahamas is all but unknown in Asia,” says Field. “BVI, Cayman and the Channel Islands are represented here three or four times a year and often appear at conferences, such as the Society of Trust and Estate Practitioners (STEP) in Hong Kong, Singapore and the People’s Republic of China. The Bahamas definitely needs to be far more visible in Asia.”
Jestin echoes that sentiment: “It’s about getting shelf space. You have to get your brand in front of people. And The Bahamas has a great brand.”
In an attempt to increase its visibility, The Bahamas was well-represented in Asia during the fall of last year, as the Bahamas Financial Services Board (BFSB) took an executive delegation to events in mainland China, Hong Kong and Singapore from the end of October to the beginning of November.
The strategic promotional tour started in Hong Kong with breakfast and lunch presentations, followed by attendance at the China Offshore Summit in Shanghai in October. The summit was designed to explain to China’s top financial intermediaries how they can benefit from the unique asset management and corporate product offerings available in the world’s international offshore financial centers. The last leg of the tour took in the STEP Asia Conference 2011 in Singapore.
This type of promotional initiative has to be the first step in a concerted and sustained marketing push if The Bahamas is going to gain any kind of foothold in the A-Pac region. With predicted economic activity in terms of real GDP growth of emerging Asian economies remaining between seven to nine per cent in coming years, it could prove extremely advantageous for the island jurisdiction to establish a prominent profile in the region.