A 62 per cent majority of APAC-based asset managers intend to boost their offering of fixed income alternative strategies to meet higher investor demand, according to the report, for which State Street surveyed 400 asset managers, including 125 from the APAC region. Of note, the survey was conducted in April and May 2015 before China's yuan devaluation and this week's global equity rout, which led to the People's Bank of China's announcement that it was cutting interest rates. Since then, a US Federal Reserve policymaker has hinted at a delayed interest rate hike.

Over half of Asian respondents said they were planning on increasing the use of derivatives to hedge against interest rate risk, while 45 per cent will increase the use of floating-rate debt securities. Nearly a third will shorten the duration across their bond portfolio, according to the survey.

“Asset managers are playing for high stakes,” said Paul Khoury, senior vice president and head of sector solutions for asset managers in APAC at State Street. “A rising market creates opportunities on multiple fronts for asset managers that are agile enough to seize them.”

Optimism was ripe with 84 per cent of respondents in APAC believing the next 12 months present greater opportunity for profitable growth, while 42 per cent said they were highly confident of their ability to direct capital to areas that will generate the most value. They also predict further opportunities for acquisitions, to enhance operational efficiency, expand distribution and break into new markets. Almost half of the region's respondents said they were evaluating target companies.

State Street called particular attention to opportunities arising from cross-border initiatives to increase the overall flow of funds into the region. The recently-launched Mutual Recognition of Funds programme between China and Hong Kong, for example, has already drawn in several investment houses. 

The move to allow cross-border fund sales between Hong Kong and mainland China from 1 July came about half a year after the Hong Kong/Shanghai Stock Connect link was enacted. Bank of China (Hong Kong) was among the first Asia-based banks to jump on board. Shortly after, Schroder Investment Management (Hong Kong), part of UK-listed private bank and asset manager Schroders, announced it was partnering with its mainland China joint venture, Bank of Communications Schroder Fund Management Co, to take advantage of the regime.

The MRF programme and the Collective Investment Schemes by the Association of Southeast Asian Nations give asset managers greater access to the region’s savings pools and help them achieve higher economies of scale, noted State Street.

“In addition, the eventual inclusion of China’s A-shares into the MSCI global benchmarks will lead to greater market accessibility for global investors into the world’s second largest economy,” the company said. “APAC-based asset managers are improving their distribution networks and operational capabilities to support these new opportunities.” 

Indeed, 60 per cent of asset managers in the APAC region are planning on expanding their distribution network to tap growing flows while almost a half are accessing new distribution channels, according to the survey.

Despite the relatively cheerful outlook, cost pressures remained evident, with 68 per cent of APAC-based asset managers estimating their cost of distribution will increase over the next five years, while a mere 2 per cent feel no pressure to reduce costs in their business.

Competitive pressures, predominantly from digital players, also appeared to be on the rise, with 82 per cent of respondents foreseeing direct competition from non-traditional market entrants such as technology companies that use their online and mobile platforms to offer money market funds.

“Asset managers see opportunities ahead,” said Khoury, who is also head of State Street Global Services for Australia and New Zealand. “But they will need to demonstrate where and how they create enduring value for their clients to achieve long-term success.”