Foreword: Pension funds in transition
By Tan Lee Hock, Publisher
Adapting to market conditions and focussing on key strengths vital to longevity
Fifteen years ago, when Asia Asset Management was launched, Asia’s pension and fund markets were very different in shape and form compared to the regime today. Many pension funds in the region had yet to embark on their cross-border investment activities. For some, their charters had to be amended, and for others, the rules concerning offshore investing had yet to be formulated. No less, a number of sovereign wealth funds and pension reserve funds had yet to make their debut too, taking shape five years later as in the case of the Beijing-based National Council for Social Security Fund or China Investment Corporation in 2007. Australia’s Future Fund was also launched that year; after much debate and delay, Hong Kong’s Mandatory Provident Fund scheme saw the light of day in December 2000.
Yes, there have been notable milestones chalked up in the last 15 years in institutional and pension fund arrangements but there have also been some setbacks and reversals, no thanks in large part to the external operating environment. The various crises that governments and the private sector have had to endure and to navigate through in the last 15 years have been extraordinary. Recessions followed by surging inflation, market bubbles, real estate and stock market collapses, environmental and natural disasters, diseases and epidemics and financial scandals have all been a feature in the years that Asia Asset Management has been faithfully chronicling the travails and achievements in the industry.
The defining moment was the Asian financial crisis in 1997 and 1998, just two years after the publication was launched; at that time, combined with the sharp economic contraction and massive job losses suffered across the region, it was a question of the survival of the fittest. Countries, not to mention companies, were driven to the wall. Many careers of finance professionals were of course cut short during that crisis, especially in the three worst hit economies of Korea, Thailand and Indonesia – all three having had to be rescued by the IMF.
Having weathered the storm, the executives in Asia’s fund industry from that crisis have since prospered, many of them now in the top echelons of global firms while others have chosen to strike out on their own, setting up boutique firms; we now see a string of them populating the region, from Japan to Australia.
The arrival of boutique operators, home-grown here in Asia or transplanted from Western financial capitals alongside some of the offshoots of global firms, has opened up a new dimension, bringing with them a wide array of investment styles and strategies that were not a feature then in Asia. Many of them offer hedge funds or have hedge fund-like strategies and fee structures.
Even so, and in spite of the proliferation of hedge funds in the region, appetite for them remains largely in the domain of the high net worth individual; allocations from Asian pension funds remain low for now.
When AAM celebrated its tenth anniversary in 2005, market pundits predicted that the fund and pension markets of China and India would provide the expected growth opportunities for global fund managers. Five years on, while there has been some headway made in terms of pension reform, their true potential remains untapped. The launch of a new pension scheme in India last year has seen low levels of participation, while in China the enterprise annuity market is still in its infancy. Recognition of both schemes by employers and employees remains low, so much work remains ahead.
In the retail market for mutual funds, China has seen the entry of more than 30 joint-ventures and through the QFII and QDII initiatives, capital inflows and outflows have provided some interesting opportunities. The controlled flows can however be better managed. Indeed, in the not too distant future, these legislative measures and capital and currency controls might well disappear as the Mainland pushes forward with its market reforms. After all, with an eye to developing Shanghai as a full-fledged financial centre by the year 2020, the yuan may have to achieve full convertibility and this could take place sooner than imagined. India, too, is poised for sustained growth. Mutual funds there suffered a temporary setback last year when the regime banned all front-end loads leading to a slump in sales. The episode highlighted the regulatory risks and the unintended side effects of well meaning measures to reduce costs to end investors.
In the years and even decades ahead, it is certain that both giants will dominate the financial and economic landscape. Along the way, as we have seen in the recent past, the road ahead will not always be smooth. To mark Asia Asset Management’s 15th anniversary, in the following pages we highlight some of the milestones that the industry has achieved and some of the personalities that have made an impression. And having chronicled the trials and tribulations, the glories and successes of the industry in past 15 years, Asia Asset Management will endeavour to continue in the same vein in the years to follow.