China’s prominence within emerging markets not being fully recognised
India is an entirely different undertaking
By David Macfarlane
To mark its 15th Anniversary, Asia Asset Management brought four Hong Kong CEOs from the asset management arena together for a roundtable session at the Foreign Correspondent's Club on September 15 to discuss and debate the past, present and future of the industry.
The first topic of discussion was on the Greater China asset class. Andrew Lo, chief executive officer, Asia-Pacific, Invesco Asset Management Pacific Limited, explained that 15 years ago, people weren't giving China much thought as an opportunity; they were more concerned with Hong Kong's handover from the UK to China in 1997 and many looked upon the PRC as a threat. "Now people talk about the growth potential in China - there are real markets there now," he said.
Mr. Lo pointed to some statistics to back up what he was saying: "Back in 1993, the Greater China market had 755 companies; today there are more than 4,000 listed companies, including the A shares. The market cap in 1993 was just over US$300 billion, now it's just over US5.7 trillion, so it's a real sizeable market now." He added that there is a lot of growth potential as well; a lot of alpha generation opportunities because of the inefficiencies of these markets, which he said was great for asset management companies.
Ilex Lam, chief executive officer, BEA Union Investment Management Limited went on to emphasise the influence of Hong Kong and Taiwan in this region. "Having integrated these three countries together as the Greater China region, if you look at the reserves, GNP, industry, servicing, technology, manufacturing and high growth potential then there are definitely a lot of opportunities for investors in the Greater China region, not only here but also around the world."
Back in the 1970s and 80s, global fund managers were talking about Japan being the dominant asset class to look out for, making it easy for people to draw comparisons between Japan then and China now. But Mark Konyn, chief executive officer, Asia-Pacific, RCM Asia-Pacific Limited, says he wouldn't go too far in comparing China and Japan as there are very different circumstances. "I think there's a different perspective whether you're based in this region (Asia-Pacific) or whether you're a global investor. Investors in this region have been fairly quick to embrace in this current cycle the opportunity of investing directly in China funds and having China exposure. So if you go to markets like Korea, Japan, Singapore, Hong Kong and in a limited way Taiwan, retail investors have bought into the China story and have maybe in a more opportunistic way bought funds."
He continued: "If you get outside the region into a global context, I think China is still embedded in an emerging market exposure. I think there's been a shift at a global level to embrace emerging market exposure at a strategic level as opposed to an opportunistic level but I think we haven't reached the stage yet where China's dominance or prominence within emerging markets is being fully recognised." Mr. Konyn claimed that the big inhibitor there is the access. "Until the currency is freely convertible and China gets its proper representation in a global index, I think global institutions and individual investors are going to be underweight in China. Until the yuan becomes freely convertible, you're going to see this build-out of exposure in China - and I think we're already beginning to see some early signs of this amongst certain institutions globally. I think strategic allocation to China is coming and I think we're going to see a big build-out of an allocation to China."
So, within the Asian equities space, if you strip out Greater China, where does it leave the Asia equity ex-Japan asset class?
Indonesia's clearly been a sleeper for some time, according to Anthony Fasso, chief executive, International, AMP Capital Investors. He points out that Indonesia currently has a very stable government in place (compared to before), it has over 230 million people, a fast growing economy and it's finally getting its time in the sun. "The rest of Southeast Asia is made up of fairly small, challenged economies and I think they kind of had their time in the sun back in 1994/95," he said. "The fundamental shift in the last five years has been from a Southeast Asia story to a North Asia story now."
In terms of fixed income, Mr. Konyn notes that there is still a lot of hype about getting access to the domestic themes in the region, particularly China. "And yet as a fund manager, when you look at the available stocks that you can invest in, whether it's in the offshore market or the onshore market, it's still fairly narrow," he said.
Mr. Lo said that in addition to US dollar-denominated fixed income opportunities there is also local currency because of the possibility of appreciation of many of the local currencies. "The issues up to now have been lack of distinct demand; there are very few fixed income funds and the pension funds that we have invest in, generally speaking, global fixed income rather than Asian," he pointed out. "The companies still prefer to raise equities rather than bonds but I think over the medium-term there's got to be great opportunities in the capital markets for bonds."
The corporate governance issues are an ever-developing part of the China market, according to Mr. Lo. "In China, I have seen quite positive steps forward in terms of disclosure and in terms of making insider trading a criminal offence - and this is an ongoing situation. More importantly, it isn't just rules and regulations, it's also to do with culture and some of this will take time - a good culture of compliance, not just to the specific rules but also to the broad principle of it all."
Mr. Lam also said he had noticed a tremendous improvement in corporate governance in China but he points out that there is still a lot of room for improvement. He added that QFII funds around the world are less than US$30 billion, which compared with the overall China market capitalisation is really very small. "So access is very low, and secondly, it is rumoured that a mini QFII is to be introduced, which will not create a big movement; so I think the situation that investors are facing in terms of picking the good stocks is that there are a lot of opportunities for asset managers to look into. I think we can search the alpha out of the Chinese elements to provide better performance to our investors."
India looks like being the other big market going forward. The big question is; how does it figure in an asset management firm's business strategy?
Mr. Lo said that for Invesco, India is a large economy that will become even larger in the years to come. "You can compare it to China in the sense that there will be the attraction for people to want to have exposure to the alpha but also as a business development you will want to develop clients and build the institutional and retail business there."
Mr. Fasso claimed that India is basically a fast moving consumer goods (FMCG) type market, so the distribution, branding and promotion is a major undertaking, which he thinks suits those companies that are well positioned in that space. "India's a much different undertaking to China as you have to have offices in 50 or 60 cities and hundreds of sales people, so that's one of the biggest challenges," he said. "No doubt there will be a lot of interest from Korean and Japanese investors into India; they really understand the India investment story better than most other investors. So you're not just going to build assets for India in India; it's building up a track record and selling it to countries like Japan and Korea."
Service providers must articulate products and services to decision-makers
The Roundtable then took on the subject of institutional distribution and marketing and the areas that need to be addressed.
Anthony Fasso of AMP Capital Investors pointed out that one thing which has developed in a positive way is the sovereign wealth fund market in Asia. He said a number of brand new agencies have been established in the last five years and there is significant capital, for example KIC and CIC and a number of others that are now probably the most interesting investors, in his opinion, perhaps globally. "You have to still be committed to these markets; you've got to have relevant products, you've got to have graded products - the name of the game hasn't changed, it's just that there are more of them in Asia and the Middle East," he said.
On how institutional markets have changed from the perspective of pension arrangements, Ilex Lam of BEA Union Investment Management Limited explained that the institutional market in the Asia-Pacific region is very fragmented, therefore service providers need to articulate their own products and services to the decision makers. According to him, there are two sets of decision makers. "One is driven by the consultants; we have to work with them continually and have done so over the last 20 years - most pension funds work closely with their consultants.
"The other set of decision makers are the investment committee members, who may have their own resources to source information for the manager - we also need to help and educate them properly. I think in general the institutional pension fund business hasn't changed much over the last 20 years but in the last few years we have also seen the importance of risk management rather than the diversifications of alpha. From a government and pension fund investment perspective, they definitely prefer a much more risk managed approach as opposed to an aggressive approach in terms of managing their pension money," said Mr. Lam.
Mark Konyn of RCM Asia-Pacific Limited shared the view that things haven't changed that much. "You still need a strong reputation; you still need people on the ground that know the client, even though there has been the development of these super-large institutions, there's still a high degree of relationship involved in developing business."
Mr. Konyn added that there is a discovery phase that those institutions go through and if a firm is involved in that discovery process, it can then build up almost a partnership with them. "I think that more than in the past, reliability comes into play - institutions themselves are going to filter out a lot of the noise and really focus on those companies that have a commitment to being with the client within the region. So you can have a great capability but if you're not committed to the client then it sort of strains the relationship and I think there is a fair degree of sensitivity around that. Ultimately, what is the client looking for? They're looking for a reliable partner and decent and consistent performance in a way that delivers true to their expectations."
Looking back to the Asian financial crisis in 1997/98 and the global financial crisis in 2008, the CEOs next discussed common themes that had arisen from the two crises and where the main issues were from the institutional investors' appetite point of view.
Mr. Konyn said that there was a lot more panic in this region during the Asian crisis and in his opinion, certain institutions pulled back from the market at exactly the wrong time. "There were structural issues going on in the local economies and local banking systems that we didn't get in the most recent crisis because it was perceived as being a global issue; if you withdrew locally, where did you withdraw to this time? Whereas in the Asian crisis, if you withdrew, you could hold your money with a large global bank or in another market or another asset class.
"This time round, I think that the lessons learnt and the fact that it was a global crisis that had less impact structurally on Asia meant that many investors stayed invested and therefore benefitted when they saw that very strong rally," Mr. Konyn noted.
Mr. Fasso said that most investors in Asia kept it pretty simple during the most recent crisis. "They stayed with equities and bonds and their main allocations didn't get into exotics and alternatives; so they stayed the course and had good advice and that's held them in good stead. They didn't have a lot of illiquidity in their portfolios, which many so-called more sophisticated funds did."
Mr. Lo added that he thinks we now take a much calmer view and a much longer-term view and recognise that these markets (Asian) are younger. "They're likely to go into periods of excesses; so when things are going very strongly, you have to be very careful in terms of building up costs very quickly - and when things are not so good, they are actually not so bad. The most important thing is to preserve the investment management ability and look after and reduce the discretionary spending while also making sure that what's really important is protected and making sure that you have the means and resources to protect the talent of the company.
Plenty of talent, not enough experience
When asked what the defining qualities were that make a successful fund manager in this day and age, Mr. Lo of Invesco responded by saying that the ability to attract and retain talent is vital to the business. "The industry is all about having the focus and the passion to work with clients and manage money for the clients. So having talented fund managers really is the key to success. To do that, it's really about finding alignment; aligned to client long-term investment performance."
Mr. Lo went on to say that as well as talent, the past couple of years have shown that in addition to the management of money, it is also very important to have a good business infrastructure. "We can see how some firms got into trouble, so good business practice is vital and that means having the resources and the infrastructure, including, compliance and IT; all those factors combine to make a good business. Some say boutique and a small, focussed team is the way to go but I think it all depends on the business model that you pursue. I think pure fund management firms like us (Invesco) can still be very focussed and it all depends on how you have designed the business model and how you keep the alignment right for the clients."
Mr. Konyn of RCM emphasised the importance of sustainability. "As you're successful and are generating returns for your clients: is your infrastructure capable of continuing to deliver that or does it reach a point where you can't repeat the success? With alignment, I don't buy into all these different discussions about ownership structure; what's most important is that people feel they have a stake in the outcome. This can be achieved in many different ways - you can have a very charismatic leader who can install that level of stakeholder behaviour or you can have equity in the business or certain ownership structures - there are many ways of doing it."
There is a wider pool of talent in Asia now but it is full of less-experienced professionals and also the expectations from them are very high, Mr. Lo revealed. "At the moment there are a lot of firms opening up and everyone is talking about it; so the talent pool in relation to the demand for the services is a lot greater, therefore there is a lot more demand for these services than what is available."
"One of the challenges that prevail is that a lot of money chases this shortage of talent, so it makes these people feel even more valuable than they really are," added AMP Capital Investors' Mr. Fasso. "I think the talent is really over-stated in China - there is a lot of talent but it's very, very thin in terms of experience."
Over the last 15 years some significant regulations and rules have been introduced, particularly since the recent global financial crisis. The CEOs were asked how these have impacted the asset management industry in general throughout the region.
Mr. Lo doesn't see the tightening of the industry as a negative thing. "The truth is that in the last ten years, the rules and regulations that have been put in place have been put there to protect the industry but at the same time to promote and develop the industry as well. For example, there was really no asset management industry in China ten years ago, so the fact that there are now clear rules of engagement there is really helpful to the industry."
On demands being made for greater transparency and increased regulations, Mr. Lam is of the opinion that it is definitely a good development for investor protection. "At the same time, you can also see the importance of product development; how we can incorporate transparency, simplicity and the objectives of risk and risk disclosure statements - I think that these are the features that we really must incorporate into our business models."