Investment management firms that expand into Asian countries outside Japan and Australia should do so with realistic goals that recognize both the limitations on short-term growth potential in the region and the many operational hurdles that will keep profit margins thinner than those achieved in western markets.

A new report from Greenwich Associates notes that, although asset management organizations have several compelling reasons to build a presence in Asia, firms that take on the challenge should temper their expectations:

• Only a small fraction of the total Asian institutional asset base is available to outside investment managers, and opportunities for asset managers remain modest compared with those in western countries; Asian institutions manage most assets internally. Although the $5 trillion-plus in assets managed by Asian institutions does not fall too far short of the U.S. institutional asset base in terms of absolute size, there are far fewer assets available to external investment managers in Asia than there are in the United States. In the United States, about 80% of institutional assets are allocated to external managers, as are roughly 47% of institutional assets in Continental Europe. In Asia, however, only 12% of total assets are available to external managers, with the remainder managed in-house.
  

• Although there are concentrations of assets in a few core markets such as Singapore and Hong Kong, Asia’s large institutions are spread across an immense geographic region and located in countries with different languages, financial systems and regulatory structures. “Covering these institutions is difficult logistically and expensive,” notes Greenwich Associates consultant Markus Ohlig.
  

• Many Asian institutions are young — some of the biggest have been in existence for less than 10 years. Many are staffed with professionals or civil servants with limited experience in financial markets, and few employ investment consultants in assessing markets or managers. The result: An almost retail-like focus on recent investment performance that makes client service and retention a challenge.
  

“In our dealings with global investment management firms, we often detect a disconnect between senior leadership in the home office and the personnel on the ground in Asia,” says Greenwich Associates consultant Abhi Shroff. “Back in Europe or the United States, the Asian market represents a growth opportunity that is frequently given prominent play in the organization’s overall long-term strategy. In the Asian office, however, the reality of the business is defined by limited prospects and day-to-day operational challenges.”