FSA: What’s the purpose of your visit to Asia?
EBC: The broader reason is that Hong Kong and Asia are an important part of Jupiter’s business. Five years ago, we had about £25bn ($33bn) under management and we believed we could sell our product to private banks [outside the UK]. So we set up in Hong Kong and in Frankfurt in Europe. Counter to Brexit, we’re internationalising.
The second reason is that we had a board meeting in Hong Kong. We just added a new director, Roger Yates, who used to run Henderson. It’s important for all directors to be exposed to the region because the tendency in the UK is you can be kind of a `little Englander’ as I call it. You don’t realise that most of the world's wealth is outside the border.
Asia is becoming the next big battleground for gathering assets. But firms must have a China strategy. Fidelity, Blackrock, UBS AM have set up IM WFOEs. Others have tried partnerships with China AMs. What is Jupiter’s China strategy?
EBC: We’re quite measured in how we think about things. Is China an enormous economy and do we want to be there in the long term? Yes. One has to take thoughtful steps on how to enter. Who are the right partners and what are the right products? Jupiter is still quite a small business at £46.9bn in AUM. It’s not a facetious quote when I say you have to learn how to walk before you can run. Let’s address the obvious areas first and do it well before we immediately announce some glamourous sounding China strategy [On this trip, his Asia travel plans do not include mainland China].
In terms of a measured China strategy with tactical moves, we don’t have that yet. We will start with Hong Kong. There is more we can do here [in Hong Kong]. The danger is that companies can spread themselves too widely. We want to do a few initiatives in depth and get it right.
We have no current plans for an investment management team in Asia. We like all our managers to be on the same floor because the culture and exchange of ideas is very important. Longer term, it would make sense to have an investment team in Asia.
SLI/Aberdeen, Janus/Henderson. Is it a valid argument that asset managers need scale in order to maintain maximum competitive potential?
EBC: I have a philosophical difference with that. What I like about this industry is it’s not like the car industry. There are clear returns to scale when you’re Toyota producing millions of cars per year. The production of alpha, which is our business, is not a scale business. Putting asset managers together you may get you certain things through sharing [resources]. But how does Mrs Wong in Hong Kong benefit if the asset manager manages $1trn and not $70bn? She doesn’t.
I would make an argument that the probability of generating alpha declines with size. The scale argument is what you hear as the current thinking. But bigger is not better. I think you can demonstrate it. There’s not a linear correlation between the biggest asset managers and their alpha. That’s the key point. If you can show me a graph showing if you manage more money, your clients after fees will get a better return, then I will alter my view.
Has Jupiter been approached for M&A?
EBC: I’m a director and can’t comment on that. We have to abide by the disciplines of being a public company. But we're entirely happy as we are. Our joke is that we are one company with 12 strategies.
When Asia moves to a fee-based wealth management model, what impact will that have on asset management revenues at firms like Jupiter?
EBC: We’ve gone through this in the UK [with the Retail Distribution Review or RDR]. Is the industry getting more competitive and generally feeling fee pressure? Yes. What do you do about it? Our strategy is very simple but hard to execute: Continue to deliver value after all fees. Then if you’re providing that product or service, you still have a business.
Did RDR impact Jupiter’s bottom line?
Not really. We floated the firm in 2010 and warned that our revenue margins would decline, not just because of RDR but because of competitive dynamics in the industry. As a single event, RDR wasn’t responsible. But will it involve changes in business models, distributors consolidating their lists and focusing on truly active fund managers – while on the other side having cheaper passives? Yes, that bifurcation will accelerate.
What is your biggest market concern?
High valuations across world markets in most asset classes, combined with how we are going to normalise monetary policy. It’s probably going to start in the US.