A new white paper by global funds network Calastone, entitled “Global Diversification and Digitalisation: The Future of Asian Asset Management”, shares insights into the challenges and opportunities the market presents and looks at how technology can be harnessed to serve investors more effectively.

The Asian asset management industry is growing rapidly, propelled by regulation that is more forward-thinking than anywhere else in the world, according to Calastone.

As asset managers in Asia seek to expand across borders and adopt innovative technologies such as tokenization, the firm believes that the need for solutions that support interoperability and scalability has not been greater.

Calastone highlighted how the Monetary Authority of Singapore (MAS) has recently begun collaborating with international policymakers and financial institutions to design an open, digital infrastructure – Global Layer One (GL1) – to enable cross-border transactions and tokenized assets to be traded across global liquidity pools via distributed ledger technology (DLT).

Hong Kong’s Cross-boundary Wealth Management Connect (WMC) Scheme has also expanded but still faces investment limits. For Hong Kong investors, mainland access remains a challenge, the firm said in a statement.

As Asia continues its rise as a global asset management hub with cross-border investments expanding rapidly, the focus on settlements is intensifying, the firm continued. Yet, the ability to settle transactions across jurisdictions efficiently is emerging as a pivotal challenge. As such, asset managers are recognising that the settlement function is no longer a back-office utility but an enabler for growth.

The report shows that the growth in Hong Kong and Singapore is largely being fuelled by international investors. Singapore sourced 77 per cent of its assets under management (AuM) from international investors, with 89 per cent of that invested outside the country. In Hong Kong, investors outside mainland China and Hong Kong have accounted for 54 to 56 per cent of total AuM. But as these markets expand globally, local investors don’t have the same access to global markets due to technology and regulatory barriers, the firm added.

Almost all survey respondents cited increasing global diversification as very or extremely important, with 89 per cent of them highlighting further expansion into other APAC markets as a priority, with exposure to North America being the next priority.

Growth in the region is not reserved for just Hong Kong and Singapore. The total AuM of Japanese investment management companies has increased by over 17 per cent compared with the previous year. Taiwan's AuM has grown by 50 per cent since 2022. Many other APAC markets have seen similar growth.

In addition, 60 per cent of Singaporean asset managers plan to launch tokenized investment products within the next 24 months. “In contrast, only 30 per cent of Hong Kong firms are actively working on tokenized products,” the firm said.

Besides approving a number of digital asset offerings, the MAS launched Project Guardian to explore the potential of tokenized financial assets. Although the foundations have been laid in the city-state, the widespread implementation of tokenized products is still a work in progress.

In the past year, tokenization activity has also seen an increase, with the Hong Kong government issuing a second round of tokenized green bonds in February 2024. However, Hong Kong funds must pick up the pace or risk losing more ground to their regional rivals. Forty-five per cent of asset managers also cited ESG compliance as a regulatory priority. But 80 per cent of investors ranked ESG at the bottom of their selection criteria.

Still, there is progress being made in Asia. For example, Singapore is reshaping its regulatory framework to address these issues. Across Asia, respondents also flagged the impact of rising costs and over 60 per cent of respondents said cost saving had become more or much more important in the last year.

“The results reflect an asset management space at a crossroads. Regulation, while encouraging innovation, can, at times, stifle it,” Justin Christopher, head of Asia at Calastone, said in a statement. “Geopolitical tensions strengthen some relationships while harming others. Increased costs and competition, but little agreement on the best mitigation routes. Overall, they show a region which has laid much of the groundwork to turn these challenges into opportunities. The question now is which industry players will be brave enough to forge a path for the rest to follow.”