Setting the stage
Category: Asia, Thailand, Global
By Toby Garrod
Thailand’s asset management industry gears up for regional grouping
Asia Asset Management held two days of conferences in Thailand in November, with the sixth annual Thailand roundtable on November 7 and another conference entitled Managing Pensions and Provident Funds for Long-Term Growth on November 8, 2013.
The roundtable broadly addressed how Thailand and the ASEAN member states were adapting to the emerging global economic environment, with a particular focus on the upcoming ASEAN Economic Community implementation, and China’s role in that, as well as the regional implications of US tapering.
The first panel discussion of they day, moderated by Subhasakdi Krishnamra, chairman at Deloitte Southeast Asia, largely assessed the threats and opportunities for Asian economies.
Responding to the first question: “How will China feature in regional developments?”, Alan Taylor, director, AT Associates Hong Kong was optimistic: “On the opportunity side, there are implications for the concept of the ASEAN Economic Community. It’s a very exciting time with implementation planned for 2015 – though there may be challenges to that. Development of the project was to some extent a defensive move, in the face of a rising China. But the benefits go beyond that. The grouping of the region’s political leaders will help to bring a level of stability to the region, as consensus is built among the member states. It will also help to protect the economy of this world from external shocks, such as those we have seen from the US and North America.
“On the negative side, it’s very unlikely that the 2015 implementation date will be fully met. It currently stands at about two-thirds ready, but even so that is remarkable progress. The other side is that there is always going to be winners and losers and some countries and corporations are better equipped to deal with this than others, which may cause pressure for change, and social unrest.”
Also talking on cross-border developments, Edwin Sim, managing director of Human Capital Management, was confident on developments: “I’ve spoken with a lot of clients over the past several months, and a lot of what they have told me is very positive. Overall, confidence is really coming back across all regions globally, especially in the US and Europe. If we look at the results of the big corporates, they are making a lot of profits, which is largely coming from belt tightening and increasing efficiencies. Nevertheless, they are being very careful about making new investments.
“But even though Asia has lost a little steam over the past year, largely due to the slowdown in China, the region is still doing fairly well. In Thailand, we’re looking forward to the implementation of large infrastructure projects that look set to boost the economy. We’re also very positive on the tourism sector, which is showing very strong growth, with 25 million visitors coming this year – medical tourism in particular.
The second panel discussion of the day looked at asset management trends and issues.
Responding to a question from moderator and Asia Asset Management’s former Associate Editor Toby Garrod on the possible future roadmap of fund passportability in Asia, in light of the three cross-border fund recognition programmes currently under development, Sarah Callaghan, director of relationship management at Income Partners Asset Management Hong Kong was pragmatic: “For us as a Hong Kong-based manager, the greatest opportunity for us, in terms of both magnitude and size, is Hong Kong/China. The ability to distribute into the Holy Grail of Asia for fund managers offers enormous potential in terms of distribution. The ASEAN one is further down the track, but with Indonesia yet to join, the full potential is some time off yet.”
Benjamin Rudd, executive director and head of overseas investment at Ping An of China Asset Management, offered a different perspective on the same point: “From our point of view, as the third-largest fund manager in China, it could be argued that it is in fact bad news – the arrival of foreign competition. But of course we welcome competition.
“While these fund passports are a nice idea, I don’t think the situation has been very well structured. Asia’s attraction is its diversity – but if you have separate passport schemes developing, it’s still not a challenge to the UCITS platform, with its broad standardised platform. There clearly needs to be further work, and the question is “How easily can they be integrated?” – particularly given that Japan is not included in any of them. It creates a problem for regional companies, because right now it’s very hard for fund management companies in the region to expand beyond their own borders given the small sizes of their domestic markets (with the exceptions of China and Japan).”
The third panellist, Narongsak Plodmechai, senior executive vice president, investment product strategy group at SCB Asset Management, also realises there’s a lot of work to be done: “Everyone in Asia is looking at UCITS standards, and the number of funds with UCITS approval is actually rising – and regulators, either implicitly or explicitly, are moving in that direction. It begs the question of whether these new platforms can be harmonised across the board. Once the passports are in place, the question is going to be “Where are you going to go, and what are you going to do there?” Even given the Singapore, Malaysia or Thailand platform, you have Singapore where you can allow direct distributions with UCITS, then Malaysia and Thailand have a second degree of freedom, where you are doing feeders.”
The final panel discussion of the day, moderated by Tan Lee Hock, CEO and publisher of Asia Asset Management, sought to find investment solutions for the current low yield investment regime.
“Currently we don’t have absolute return related products, so we are trying to increase or newly invest in absolute-related return products,” said Min Ho Park, CIO, Teachers’ Pension (Korea). “Next year we are considering hedge fund investments. Mainly looking at long-short strategies. Secondly, we are trying to increase the portion of overseas investments, but as we are not hugely familiar with overseas investment products, I think passive structures will be more effective than active ones. So ETFs could be a good choice for us. Also, we are quite interested in smart beta-related products.”
Still on the passive theme, Win Promphaet, head of investments at Thailand’s Social Security Office, gave his view on ETFs: “We may use ETFs specifically to get certain rates of return in the stock markets and in commodities,” he noted.
Yingyong Nilasena, deputy secretary general, fund management group at Thailand’s Government Pension Fund, also expressed interest in passive investing: “We have been using ETFs to get specific exposures, but after a while it became clear that mutual funds offered us better returns thanks to the additional alpha. We are not a fast mover, so there’s need for us to utilise the daily trading capacity of ETFs.”
The panel then addressed the trend to move out of the sovereign bond markets.
“For the next five or ten years, we will likely be putting more into equity than bonds. We actually don’t see much value in global government bonds right now, but since we are a government fund, we are obliged to keep our allocation to some extent,” said Mr. Win. “What we might also do is allocate more to emerging market credit to increase our yields. While we are keen to allocate away from bonds, when you look at equity you can see that prices have gone up a lot in the US and Japan, which raises questions about value. We have to be more selective.”
Mr. Yingyong shared a similar view: “We have very specific [official] limits to our allocations, and right now we are over 60% allocated to Thai government bonds, where returns are much better than global bonds. Since the beginning of the year  we have actually reduced our exposure to global government bonds, to the point that now we only have exposure to global corporate bonds.”
In a separate presentation, Chanitr Charnchainarong, executive vice president, head of the issuer and listing division and president, for the market for alternative investments at the Stock Exchange of Thailand, spoke on the rising capacity for investors in Thailand’s stock exchange to gain access to listed companies that have strong exposures to the rising economies of Cambodia, Laos, Myanmar and Vietnam (CLMV).
He highlighted the remarkable number of stocks that fitted this category, some of them with exposure to the entire CLMV region.
“These are the areas where we spend most of our time educating our investors,” he said. “Investors are very interested in all the growth that is happening in this sub-region, and many investors from the broader Asia region are now coming to access the market growth in these countries from Thailand.”
Separately, David Tan, CIO for fixed income, Asia Pacific, at Allianz Global Investors, spoke on the emergence of a separate asset class for institutional investors within the bond markets.
“By 2036, 50% of the worlds’ goods and services are likely to be produced by emerging Asia. At that rate, China will overtake the US as the world’s largest economy by 2020. The US will be number two and India should take third place. Meanwhile forex reserves have grown remarkably, with China alone having US$3.3 trillion in reserves. Meanwhile, developed nations have seen forex levels decline. Finally, government debt levels have decreased remarkably in the region.”
He continued: “Given the strong fundamentals, it makes the region extremely attractive for institutional investors. What these investors ultimately want with fixed income is to get their par investments back to meet their obligations, and that makes Asia a very attractive new target.”
The next stage
Keynote speaker Aswin Kongsiri, a member of the monetary policy committee at the Bank of Thailand, talked about Thailand’s role in the forthcoming ASEAN Economic Community. “Our location demands that we have infrastructure,” he said.
“Thailand appears stuck in the middle-income trap. Its growth has been driven by foreign direct investment and borrowing to finance investments overseas. The driver has actually been technology provided by foreign investors. We have been good at absorbing that technology, but we haven’t been so good at building on it for our next stage of development.
“In the ten years or so since the Asian financial crisis, Thailand has had plenty of time to learn its lessons and move on, and we are seeing now that one of the key aspects of Thailand’s economic stability is the strength of its financial institutions – but there are also weaknesses there. When the Lehman crisis came about, Thailand was in a good condition to absorb that crisis, and Thailand’s growth rate was not reduced significantly.
“Then, two years ago, we had our floods. Actually, it’s been estimated to be the most damaging fresh water flood in world history. And again, we recovered from the floods quite significantly. In the following year, GDP had bounced back hard and by the end of 2012, we appeared in good shape.”
He asserted that Thailand’s ability to bounce back, and its various current development drives (anti-corruption, for instance) will see it negotiate the current political woes without significant problems.
The second day of conferencing was focused on cross-border investing and the benefits of diversified portfolios.
For the opening panel discussion, Richard McGillivray, director, industry relations, Asia Pacific at the CFA Institute, led discussions on the benefits and practicalities of implementing Global Investment Performance Standards (GIPS) in Thailand.
Responding to the question, “How widely do you think GIPS is known to asset managers in Thailand?”, Singha Nikornpun, former director at the Deposit Protection Agency, Thailand, said he saw room for improvement: “I don’t think GIPS is new to asset managers, but I think it’s new to asset owners. They don’t have any idea what the benefits are above the current systems.”
Addressing the same question, Dr. Man Juttijudata, senior director at the investment strategy department of Thailand’s Government Pension Fund, said: “When I used to work as a risk manager assessing performance measurement, we’d just look at the CFA textbook to see how we could compose the benchmark returns and the NAV of each strategy, and then come up with a standard – which at that time took years given the lack of understanding. But now I think it’s much more acceptable in the industry. We have a lot of fund managers that have the CFA designation, and they really know what GIPS is. They also know more about corporate social responsibility (CSR). So we don’t think it’s hard to apply it. We have to increasingly promote it to the asset owners, and then they will in turn revert to the asset managers.”
Ekachai Chongvisal, CEO of the Association of Investment Management Companies (AIMC), noted that: “The association has performance measurement standards that are in line with the old CFA standards and GIPS. But somehow the advertisements don’t follow suit. They annualise six-month, short-term fixed income products in their advertising. Investment managers follow the rule quite closely, but somehow, the advertisements don’t comply. We tell them that is something that we don’t want to see.”
The panel was then asked if they thought Thailand would benefit from a wider adoption of GIPS.
“I think it will be of benefit, because it would provide investors with transparent performance and allow them to compare apples to apples,” said Mr. Singha. “The problem is helping them better understand the benefits, because actually, I don’t think that the gap is large in Thailand. But in order to employ the same standards, we should have someone to initiate the programme. Right now the SEC has worked hard to make it a requirement.”
The second panel discussion of the day, moderated by Mr. Garrod, focused on investment management in the post-tapering environment. The panellists were quick to point out the challenges to foretelling investment conditions, and expressed concern about the broad economic framework that the world currently operates under.
Responding to the question, “What might be the impact on the US dollar of US tapering?”, Triphon Phumiwasana, director, external fund management, at the Government Pension Fund (GPF), expressed serious misgiving about current expectations: “The question I have is, whether or not we are actually going to face tapering in the first place?”
Andrew Stotz, president of the CFA Society in Thailand, agreed: “I don’t think we are actually going to see tapering. If we look at the history of the situation, particularly in regard to Thailand’s own experiences, we may learn a lot. In 1997, we had our own crisis, and government-related entities stepped in and took over many of the non-performing loans, and managed the assets as best they could. Meanwhile, a portion of the assets was left with the commercial banks. Thailand suffered years of sub-par growth as the banks tried to work things out. Depositors or taxpayers always pay in the end.
“The debt remains at the Bank of Thailand, and stands at about US$30-50 billion. But the burden of it is very low, related to debt levels in the overall economy. Meanwhile, the private economy has actually worked out its problems.
“What happened in America was a little different. Originally, everything got shoved onto the banks, and that allowed them to control the US government very well – and now there is US$17 trillion of debt on the US government’s balance sheet. That means they cannot let the interest rate rise on that debt, or they will blow out the budget.”
Mr. Triphon was more optimistic: “Changes to tapering are going to be data dependent, which means that the US authorities are going to be zooming in on every angle of the US economy; the housing market in particular. Decisions really depend on the US economy. If you really look at the US economy after the latest announcements on tapering, we can see that applications for mortgages have actually dropped dramatically, which already signals something in the system.
“On one side, the US economy is growing, but on the other side, rates are going up. Janet Yellen has to balance this sort of thing. It’s going to be very difficult. Right now, what’s causing worry at the Fed is that QE has started to create bubbles. What I expect the Fed will in fact do is keep on with QE and start pricking these bubbles, using other tools. Just like what China has been doing.”
Smart beta strategies
The first presentation of the day, from DIAM Co, expounded the virtues of smart beta.
“At DIAM, we believe in smart beta as our research has shown the advantage these strategies offer over the cap-weighted approach,” said Keiichiro Okuda, head of global marketing, global marketing group, at DIAM. “In particular, we have found that a minimum variance approach offers the greatest advantage in terms of risk-adjusted returns, and this approach is at the heart of our smart beta product suite.
“DIAM’s smart beta offering stands out from the crowd in the use of our excess returns model (ERM),” he noted. “This model, which we have employed and refined for nearly 20 years, is based on a range of sophisticated factors which rate the attractiveness of a stock from a fundamental perspective. In this way, we can ensure that the stocks we hold not only have a high dividend yield and low volatility but also attractive fundamentals according to a wide range of advanced measures.”
Following the DIAM presentation, Richard McGillivray, director, industry relations, Asia Pacific, at the CFA Institute, spoke on the importance of establishing GIPS in Thailand.
“Thailand is the 37th country to join the global alliance in supporting the GIPS framework,” he noted. “The GIPS standards are voluntary standards governing the calculation and presentation of performance standards. The point of the committee is to ensure that the standards are globally adopted, and the value of the standards lies in the ability for global comparison. We seek to ensure that accurate data informs the input of performance presentation and calculation. The purpose is to promote fair global competition among asset management companies, which in turn promotes investor interest.”
Dr. Pisit Leehtam, president of the Thailand Provident Fund Association, outlined the dramatic changes that have taken place in Thailand’s asset management industry in recent years during his keynote speech.
“If we look at the investment behaviour of Thai pension funds over the last 20 years, we can see much change. Before 1997, the Thai economy was growing at a rate of over 7% per year, everyone was getting more and more income, and the interest rates offered by commercial banks and finance companies were very high, often over 12%, sometimes even 18%. Meanwhile, the government or central bank was providing blanket guarantees for bank deposits because they wouldn’t allow any bank to fail. Obviously everyone was banking his or her money. Most pensioners when they got lump sum payments would put the money into banks and enjoy this income. As such, capital market investments were not popular.
“But the 1997 crisis took the entire country in a very different direction. The baht depreciated sharply over a period of six months. This trend, combined with pressure from the central bank, ensured that very few people were investing offshore. Meanwhile, interest rates went down to nearly 0%.
“In the last 15 years, the baht has appreciated gradually, and it has now reached an all-time peak, to just above where it was in 1997. As you can see, both before the crisis and after the crisis, there was clearly very little interest in investing abroad.
“These days, however, even though the situation was not that conducive, the GPF has invested around 20% of its funds abroad, mostly in equity. As such, it is the most progressive investor in Thailand. But others, such as the Social Security Fund, have been much more timid.
“In recent years the central bank has been a lot more encouraging in regard to investing abroad. We’re seeing money going into Korean funds and US funds, for instance. The baht meanwhile has peaked, making overseas investments much more attractive.”