Southeast Asian markets back in the frame
CPF ranking system going through reform process
By David Macfarlane
The Singapore leg of Asia Asset Management's CEO roundtable series proved to be a lively and sometimes heated affair. Five CEOs from the asset management industry stationed in The Lion City attended a two-hour lunch session at the well-appointed Tower Club where some dynamic deliberation and dialogue ensued.
Asia Asset Management's publisher and moderator for the occasion, Tan Lee Hock, opened up the discussion by asking the attendees how they thought equity markets had changed over the last 15 years in Singapore and beyond. Hugh Young, managing director, Aberdeen Asset Management Asia Limited, was quick to respond. "In a sense not much has changed," he said. "Southeast Asia has come back into favour in terms of market performance but not necessarily in terms of marketing. Indonesia has done well as a sleeper economy - that's a story that crops up every ten years or so when people forget poor performance in the past. The same names come back to try and have a second or third bite at the cherry. So in a sense markets look remarkably similar in terms of characteristics but the details have changed and the focus has got bigger."
Gerard Lee, chief executive officer, Fullerton Fund Management Company Ltd, agreed that the fundamentals of equities investing haven't changed that much, but in terms of people's preferences, he pointed out that the last ten years have been consummated by China and India, primarily China. "Things have moved north," he observed. "In the last five to eight years, we have been wondering if anyone will actually come back to Southeast Asia! The North Asian markets, especially China, have developed a lot and so has Korea."
He continued: "The other big development is in the way that people manage money - with the advent of hedge funds, there is this other phenomenon where people want to go into absolute return investing. Even the more traditional guys like us have become more benchmark agnostic - so within the menu of products, there will be a high conviction portfolio that will be offered to people that you might not have - but if that was already in your investment process, or your product, then good for you. A lot of people will be subject to tracking errors and so on - that is because consultants want you to show them where and what the tracking errors are. So you have no choice because there is this big part of the pie that you don't want to miss - absolute return investing, high competition, benchmark agnostic."
For buy and hold camp operators such as Aberdeen and Schroders, Mr. Tan asked how the entry of the high frequency traders, the hedge fund operators, the systematic guys i.e. the algo-traders, have affected the way in which they operate.
Lester Gray, chief executive officer, Asia-Pacific, Schroder Investment Management Limited, said he thought it was a case of chalk and cheese. "I don't think there's any overlap between fundamental research-based buy and hold strategies and algo-trading," he claimed. "It's like comparing water to a plate! One of the obvious changes is when you look at the make-up of Asia-ex indices and think about the weighting of China and India 15 years ago relative to where it is now. There's been a massive change; benchmark-relative, you're forced obviously into more Northeast Asia exposure. The other difference is the range of investment styles; 15 years ago it was predominantly benchmark relative and core investment styles whereas now you'll have total return and absolute return benchmark relative, benchmark unconstrained growth value - whether any of that is being ultimately hugely beneficial to the end client-take, I guess only time can tell."
Deborah Ho, CEO, DBS Asset Management said that investors these days have more choice now because of the emergence of countries that in the mid-90s were not available to them before. "Investors' choice in terms of the geographical spectrum and so on is greater. The other thing is that investors also have choice in terms of what strategies they elect to use; previously we didn't have very many hedge funds, these days it's the whole spectrum. Given this whole spectrum, the big question is going to be as to whether people are going to make money from all of it. To me it's rather mind-boggling in terms of availability and selections."
Ms. Ho added: "The tried and true methods of doing your homework and going down to look at a company, looking at value - that will always be important and will always have a place. But we do see that as a result of the markets moving forward and people having more choice in investment products and in strategies and companies and countries, the challenge is to decide whether you want to be tried and true, and do it, or offer the whole gamut of investments to investors."
Fixed income versus equities
In developed markets, one of the big drivers in the reduction of equity ownership is what's happening in pension funds, according to Mr. Gray. He says that in the UK, a number of DB schemes have closed and many of them are hedging out and hedging their liabilities through predominantly fixed income, and therefore the ownership of equity is reducing in developed markets.
Mr. Young commented: "Luckily we don't have many all-encompassing pension funds in that cycle of business. That's a relatively small side of our business that we whittled away until it was very small. People didn't know where they were putting their money - you just looked at where people were putting their money and it certainly wasn't where I'd be putting my pension fund."
Wong Kok Hoi, chairman and chief investment officer, APS Asset Management, pointed to the fact that there have been four major crises in the last decade or so: the Asian crisis; the bursting of the internet bubble; SARS; and then the global financial crisis. "These are not necessarily things created by equity investors, capital markets or equities per se. These were actually fixed income-related issues," he stated.
Rules and regulations
One affect of the global financial crisis (GFC) is that regulators are now raising the bar - Singapore is now going through the motions of changing the regulatory environment for asset managers to operate. This tightening of the rules will obviously have a major impact on the asset management industry. Mr. Lee admitted to being a bit concerned about these regulatory implications. "I wouldn't call it overkill because after the GFC some measures had to be taken. Unfortunately it will increase the costs of operating - I see these things as cyclical; it comes and it goes then after five years nothing happens and then there will be liberalisation - until the next big bang comes along!"
Mr. Gray followed on saying that a lot of the changes were very much warranted. "Some of the selling practices of funds in some locations were not worth contributing and I think there's been a quite natural regulatory response to that" he said. "I think for managers such as us around the table it's a good thing in the long-term; we will go through a bit of pain in the short-term as gross sales levels undoubtedly come down in most markets. But we all believe that the market needed to mature in terms of how people invest, how people are advised, the sorts of products that they buy - and I think that needed a sort of regulatory catalyst to bring that about - and that's what we're seeing. We just need to make sure it doesn't go too far and start impacting things negatively from the perspective of end investors."
As the discussion moved on to corporate governance and the overall intent to protect the investor, Ms. Ho said that a large part of the issue is not necessarily to do with the people that manufacture the fund products. "For the longest time these products have been distributed through bank channels from other parts of the world. During this whole crisis, I would have thought that the role of a real professional, knowledgeable, financial advisor would gather more momentum in Asia rather than banks. I believe the bridge hasn't been crossed between funds being sold and funds being bought - investment products are all being sold. This will only happen if we can get to a point where investors are savvy enough to make the decisions themselves and perhaps for this to happen governance needs to occur in terms of certification and education etc."
Mr. Young quipped: "Banks and private banks are just full of salesmen, really."
Mr. Gray continued the flow of conversation adding that he thought the proposed regulatory changes could be beneficial in as much as bringing about more of an advisory responsibility. "The distributors have to understand the clients better than they have done in the past; they have to understand their investment needs, they have to be able to explain an investment product - there's talk about minimum levels of training for those investment sales people or advisers. I think all of that is heading in the right direction."
Mr. Young pointed out that fund managers have had to be regulated for a number of years now and complained that in the past banks have recommended products that they didn't know much about in order to make a sale. Mr. Gray responded saying under the proposed changes that will be no longer be possible - "which is good!" He added that these measures will benefit the asset management industry in the long-term although he warned that in the short-term there could be some negative fall-out.
Singapore's Central Provident Fund (CPF) system has been coming in for some criticism lately as a result of its ranking system and the way in which it analyses funds. "It's a necessary evil on funds that they are rated but there are a lot of question marks as to just how they are rated. The current objective of CPF to pick out first quartile funds is an interesting one," remarked Aberdeen's Mr. Young. Mr Gray agreed, adding: "There is a lack of clarity in terms of the subjective measures that are being used."
Mr. Young revealed that Aberdeen's China fund had been removed from the CPF because, he guessed, the firm had complementary managers in so far as its China fund is 90% in Hong Kong. "A year ago when we were kicked out it had done badly, of course a year later now it's top quartile," he said. "When you have a clear, consistent philosophy that's behind the fund that's well articulated and people know, why shouldn't they buy it? It's perilous; if you buy a first-quartile fund, would it always be first-quartile? We all know the answer to that."
Mr. Gray elaborated on the subject disclosing that he recently had a very direct conversation with CPF on the rating issue during which he though some progress had been made. "I think the raters are now taking a more broad view of the definition of first-quartile. Clearly there has been a lot of feedback in terms of the rating process."
In his role as chairman of the Investment Management Association of Singapore (IMAS), Mr. Gray divulged that he had made it clear that the process needed to be much more transparent for managers so that they could understand it. "It seemed to be to many of us a bit of a black box where we got told you've passed or you didn't pass and if you didn't pass these are the reasons. But they were usually purely statistical in terms of ‘are you first-quartile on one year, three years performance numbers?' Depending on whether it's yes or no you're either approved or not approved. If that was going to be the process, then it's clearly not the correct process. Now we have been told that is indeed not the process, it is but one measure that goes into the determination. So funds are still being reviewed for approval on an ongoing basis."
The Lehman minibonds scandal in Hong Kong, Taiwan and Singapore was not actually an asset management issue, it had nothing to do with fund managers, but still fingers were pointed at them. Mr Gray of Schroders answers: "That just shows you one of the challenges of investor education here."
Mr. Wong of APS added that since the sub-prime crisis, investors have become more demanding and they also want to know exactly what they're investing in. "For instance, an Australian superannuation fund came to us a few months ago and spent six hours on due diligence. They looked at everything including our stock selection, systems, the back office, you name it. This was my longest ever due diligence with an investor and it was spread over two days. In the past I think that when times were good maybe an hour, an hour-and-a-half would have been enough for most investors. This would be followed up with a call or email to say if you had been appointed or not. These days I think the due diligence process takes months." Mr. Young went on to say that it's all organisational rather than just what you buy or sell in your portfolios.
Mr. Wong continued: "I think a lot of investors now want to see that the manager has got the skill sets that can be repeated. In the past, when they looked at skill sets, they did not place as much emphasis on them as they do now."
Fullerton's Mr. Lee stated his belief that Asia is where everyone wants to be and it is where everyone wants to invest their money. "Firms here are all Asian experts - actually managing money from Asia and not sitting in London or New York. So logic would suggest that better days are ahead of us. What I think will be interesting to see is how the Chinese and Indian AMCs flex their muscles. In my opinion they will grow inorganically and for at least the next ten years will be looking for targets to acquire. Pan-Asian AMCs with long capabilities will make interesting acquisitions for them - I think acquiring somebody from this part of the world i.e. Hong Kong or Singapore, makes a lot more sense than acquiring somebody based in London with Asian expertise.
Mr. Gray wrapped up the session by claiming that post GFC; people are paying much more attention to the type of firm that they employ as a fund manager. "The fact that we're (Schroders) a 200 year old company with consistent family ownership throughout that period with an absolutely bullet-proof balance sheet - those things which were given no importance at all pre-credit crisis - it just came down to ‘what were your performance numbers in the last one year, three year periods?' And suddenly investors have become much more interested - we're very happy with where we're positioned right now."