Embracing the winds of change

Category: Asia, Malaysia, Global
By Nazneen Halim

AAM’s annual Malaysia event tackles key issues facing the industry

In the last year alone, markets have seen unprecedented movement influenced by factors such as Brexit and the election of US President Donald Trump, and it seems as though nothing can be truly anticipated anymore. Rising political tensions in Asia, with an increasingly aggressive North Korea, the steep devaluation of the Chinese renminbi and the usual volatility in emerging markets, have all translated into a riskier environment. There is also the issue of the so-called Terrible T – technology – which has been disrupting all industries. Is this therefore time for asset managers to become nimbler, or will they choose to fight against the current?

Downward pressure on fees has also affected the revenue pool of asset managers. Changing investor preference from seeking huge payoffs to more sustainable returns has also sparked some soul-searching amongst the managers. Looking to address these key industry issues were the panellists and presenters at Asia Asset Management’s (AAM) 7th Annual Malaysia Roundtable, held in Kuala Lumpur on May 24, 2017.

The conference, themed Institutional Investments and Pensions: Dawn of a New Era, was attended by over 150 industry professionals from all over Asia. The participants came from a wide range of players across the industry – from government-linked institutions such as Malaysia’s Employees Provident Fund (EPF) to corporate giants such as Canada’s Manulife Asset Management.

The event kicked off with opening remarks by Tan Lee Hock, the founder and publisher of AAM, who relayed to the audience the dramatic changes currently facing the asset management industry, marked by a new phase of global consolidation which is sure to have an impact on how the money management sector moves ahead in coming years. He said the pensions industry is also seeing an interesting phase in its development, with the need to address an aging society worldwide. Asia’s pensions industry in particular is experiencing a sea change in the way it manages long-term risk and tackles the issue of longevity.

Mr. Tan thanked the event’s partners – Kenanga Investors, Manulife Asset Management, Nuveen-TIAA, Stradegi, NUS Business School’s Centre for Asset Management Research & Investments, and the CFA Society of Malaysia – before handing over the microphone to the first speaker of the day, Amy Muska O’Brien, managing director and head of responsible investments at TIAA Investments, an affiliate of Nuveen.

Responsible investing

Entitled How ESG Impacts Investment Decisions and Returns, Ms. O Brien’s presentation shone an optimistic light on the current state of play in environmental, social and governance (ESG) investing, demonstrating that the sector is no longer considered niche or specialised, and has begun to make an impact on the mainstream investment landscape.

According to the United Nations-backed Principles for Responsible Investments (UNPRI), there is currently US$62 trillion in AUM committed globally to ESG initiatives, and the motivations for institutional and individual investors to delve into ESG investing are incredibly diverse. Ms. O’Brien said that institutional investors in particular entered the ESG space for client-defined solutions, and a significant number of companies are beginning to realise that ESG investing is a better risk management tool because it considers long-term value drivers.

Growing requirements on the policy side has also spurred companies to become more sophisticated in terms of information disclosure. This, coupled with voluntary disclosure standards led by industry associations such as the US-based Social Accountability Standards Board (SASB), has increased pressure amongst asset owners to lean on their asset managers in terms of compliance and transparency.

Globally, sustainability themes such as the Paris accord on climate change is driving the push for greater regulations and setting carbon emission goals. Pension funds, Ms. O’Brien said, are also looking to partner with asset managers to adhere to new global regulatory requirements on ESG incorporation.

In Asia, there has been notable progress on the ESG front, with countries such as Hong Kong, Japan, Singapore, Malaysia and South Korea enacting ESG stewardship codes since 2014, and an increasing number of stock exchanges providing issuers with guidance on how to report on ESG. Ms. O’Brien said that although the field of ESG investing has expanded dramatically, there is a need for greater buy-in amongst analysts, global dialogue, and partnerships, as well as better alignment of disclosure standards.

Changing dynamics

The first panel session of the day was a question-and-answer (Q&A) with chief executive officers (CEOs), entitled The Changing Dynamics in Asset Management, Outlook and Challenges. The panel comprised Ismitz Matthew De Alwis, executive director and CEO of Kenanga Investors; Jason Chong, CEO of Manulife Asset Management; Sharizad Juma’at, CEO of RHB Islamic Asset Management Services; Simon England-Brammer, senior managing director and head of Asia Pacific at TIAA Global Asset Management; and Praveen Jagwani, CEO of UTI International. They discussed a gamut of issues within the asset management industry, from the emerging trend of global consolidation, to diminishing fees for active managers and the rise of robo-advisers.

On the topic of consolidation as a result of increased downward pressure on fees, Mr. Jagwani believes that the issue is structural, and will persist as a result of the current low interest rate and low-yielding environment.

“There are two kinds of asset managers, the big boys and the boutiques. Bigger asset managers tend to drift towards the mean and can’t chase exceptional returns because that carries exceptional risk, and if you’re a small player you don’t have pricing power. Overall, fees are fast disappearing and the advancements in machine learning, fintech [financial technology], blockchain etc. only means that it [fees] will continue to go down. It is here to stay,” he said.

Adding to Mr. Jagwani’s comments, Mr. De Alwis said that although there is a downside to the structural change in the pressure on fees, it is an opportunity to promote transparency amongst asset managers.

According to some industry observers, investors are increasingly looking at passive management when it comes to portfolio management. To this, Ms. Sharizad commented: “It is the nature of investors – be it retail or institutional, to lean more towards high-yielding alpha, and it will take time for the market to appreciate and embrace passive management. The retail markets in particular are looking for higher yield, which for now can only be delivered via active management.”

Mr. England-Brammer added: “From an internal perspective, this is a very cheap way of managing money, and this comes back to fees as well. If a good, long-term sustainable alpha-generating manager can deliver, then fees can be applied to that. I think it’s also interesting how we’ve seen a development within the beta arena and there’s lots of focus around the ever-growing drive around smart beta and the active end of beta management. So there’s a new asset class that’s grown within the beta space as well.”

The panellists also addressed the issue of compliance and rising costs, and all agreed that it is a price worth paying. “I think the real benefit only comes when something goes wrong and it’s important to have it in place, especially when you do a post mortem. It definitely increases the cost of doing business for us but it is a necessary development,” Mr. Chong said.

As for the growing influence of technology in the asset management space, Mr. Jagwani stated that although it is inevitable, and might involve cuts in terms of human capital, it could mean significant cost savings and shorter settlement cycles. “That means there’s a tremendous scope for optimisation of that cost for asset managers. So, there is hope,” he said.

Mr. Chong also shared his thoughts on fintech, saying that it is here to stay and should be embraced for the betterment of the industry. “It will open up a new market in terms of the mass affluent market – which sits between basic retail investors and high-net-worth individuals, and tapping this market going forward will create a lot of opportunities. All these tools will enhance the adviser interaction and help them sell their products/ funds, and basically supplement their efforts. As we know, investments in Malaysia and Asia are still generally sold and not bought, and investors still want human interaction.”

Indian outlook

The panel discussion was followed by a presentation on India’s Economic Transformation and Investment Opportunities by Rana Gupta, senior portfolio manager, India equity specialist at Manulife Asset Management (Singapore). In his presentation, Mr. Gupta expressed optimism on the long-term structural outlook for India, saying that the country’s economic transformation marks the dawn of a new era. “GDP is picking up, inflation has come down, and the government is spending more on infrastructure, but not at the cost of fiscal growth. Although historically, credit penetration in India has been very low because people do not have transaction histories, no identification cards, and therefore cannot access banks and get credit, this is set to change as credit prices fall.”

Tomorrow’s world

The second panel discussion of the day covered pensions and explored important topics such as financial literacy and investor education. Chaired by AAM’s Mr. Tan, the panel comprised Nurhisham Hussein, head of the economics and capital markets department of the Employees Provident Fund; Dr. Chung Tin Fah, associate professor at HELP University’s ELM Graduate School; and Dr. Joseph Cherian, practice professor of finance and director of the Centre for Asset Management Research and Investments (CAMRI) at NUS Business School.

Asked about what constitutes a good pension fund structure, Dr. Cherian said: “The average retiree is looking for some sort of level payout to help them maintain their standard of living and include some leisure. This payout should therefore grow at the cost of living – which as we know, is going up in Asia – and should grow at the rate of inflation, or some measure of inflation. It should also last for as long as you live. Therefore, the programme should be a prudent one, at least for the safety net amount of savings.”

On financial literacy, Mr. Nurhisham was candid in his opinion: “The Malaysian person’s level of financial literacy is roughly about the same as the global average – which is terrible. When you start talking about interest rates, compounding returns, inflation, a lot of people still have no idea what’s going on. What the Employees Provident Fund (EPF) is doing, in collaboration with the Securities Commission of Malaysia and Bank Negara Malaysia, is to promote financial literacy. The (Malaysian) government has already approved the inclusion of financial literacy into the secondary school curriculum, whilst amongst banks, including the EPF, we are basically repurposing our counter staff to become financial advisors… whereby we take them through the whole financial planning process.”

Dr. Chong also said that it is important that retirees are able to generate a stream of income from their existing assets, for example in the form of an annuity or rental income. “It is very rare that people would want to employ an older person, so it is crucial that they are able to monetise their assets in such a way that they are generating income.”

Operating models

Over lunch, Vivek Jamwal, practice head (risk & research) at Stradegi Consulting, delivered a special presentation on Evolving Operating Models for Asset Owners. Mr. Jamwal spoke about current trends towards alternatives as asset owners struggle to meet their liability goals amidst the current low-yield environment and increased fees.

“The passive market has grown, bringing efficiency into the market. Investors are also gaining beta exposure from ETFs and more asset owners are moving buyout funds in-house. As the front office and products become more complex, the back office and middle office have to evolve to support [the front office].” He added that: “In a nutshell, asset owners are starting to look like asset managers as they become increasingly sophisticated in the way they invest in markets.”

Mr. Jamwal also cited the Canada Pension Plan as an example of a good pension fund model: “Its independence from the government limits interference in its operations. It also has a well-diversified portfolio – domestically and internationally across asset allocations, significant liquid investments, a strong emphasis on cost mitigation and a strong investment committee board made up of seasoned investment professionals.”

Absolute returns

Following Mr. Jamwal’s presentation, the afternoon session of the event began with a discussion on Absolute Returns: The way forward. The panel comprised Akhter Abdul Manan, group chief investment officer of MNRB Holdings; Sharifatu Laila Syed Ali, group CEO of ValueCAP; and Teh Yeow Yong, investment director at Navis Capital.

Commenting on relative returns, Ms. Sharifatu Laila explained that it all boils down to realised returns, and that managers need to first understand the changing balance of power. “We as asset managers need to know what kind of client we are dealing with. These are asset owners who are looking for realised returns of a certain level, and capital preservation. So that is one of the few things that is key to an absolute return strategy. Additionally, the current environment is becoming more challenging as regulators ramp up the pressure, and despite the low-yield environment, the pressure to deliver on returns remains strong, particularly in Asia.”

Touching on absolute return strategies, Mr. Akhter said that according to conventional wisdom, it generally has to be unconstrained. “In this environment, it is interesting to see how this applies to domestic fixed-income mandates. In terms of unconstrained versus constrained portfolios, it is relative straightforward. However, if it’s a fund that has a mixture of asset classes like fixed income, you can add equity, bonds, property, and cash. So what I find is that fixed income is the anchor in the portfolio, and you can use your cash to control the volatility and risk. That will help to give you a consistent return.”

ESG revisited

As the main theme of the conference was the Dawn of A New Era, it only seemed natural that the trend of ESG investing was revisited in the latter part of the day. This time, Madhu Gayer, head of investment analytics for Asia Pacific at BNP Paribas Securities Services, approached the topic from the perspective of a custodian, covering how to measure, monitor and implement ESG strategies while extracting value. His presentation revolved mainly around BNP Paribas’ recently launched global ESG survey, in which it was found that growth is expected to occur by up to 50% over the next two years on the back of increased commitment from clients and investors alike.

He said that Asia Pacific investors would be the regional ESG champions, moving ahead as jurisdictions such as Malaysia increase activity in the shariah compliant space, which already incorporates ESG principles. “Growth will come from alternatives such as private debt, private equity and infrastructure, as opposed to classic public markets,” he said.

According to Mr. Gayer, the challenges that the sector will face in coming years include analytics – where the data that is gathered needs to be processed in a meaningful way – as well as a lack of expertise, especially with regards to quantitative analysis. However, he added that groups such as the CFA Institute and the UNPRI are encouraging the development of expertise by providing relevant courses. “ESG is here to stay, it is growing significantly, and will have massive repercussions in Asia.”

Global macro view

Dr. Enzio von Pfeil, group economist and director at Odyssey Capital Group, was up next with a presentation titled Global Macro View: Risks and Opportunities. He said that there are essentially four different themes globally: the economic clock, defence, demography, and education.

“The economic clock involves pattern predictions and helps you tell the economic time when you look at business cycles and profit cycles.” He added that there is a so-called demographic dividend, meaning that young people are good for economic growth because they are more productive. He also made the link between defence, demography and education, explaining: “Social unrest is a function of discontentment – attributed mainly to the misdistribution of income which is prevalent in Southeast Asia, and it is also closely related to demography, and most certainly education.”

Active vs. passive

Jason R. Toussaint, managing partner at Hard Asset Partners followed, engaging in a lively Q&A session with AAM’s Mr. Tan on the active versus passive debate. According to Mr. Toussaint, although the debate rages on, he himself isn’t entirely sure why. “Basically, the more efficient a market is, the more inclined investors should be to index it. The less efficient, the more alpha an active manager may be able to add.”

He also added that there has been growing interest amongst institutions for exchange-traded funds (ETFs). “If it’s a completion strategy or transition mandate it’s great, but institutions that can engage and grant a separate account mandate with an account manager are much better off. It is also good to have direct control and access to the portfolio manager. Investors can also add alpha and have direct ownership of the underlying asset. They can also force their managers to devote their proxies for them. ETFs are also much more tax efficient.”

Investing in ASEAN

The final panel session, which concluded the roundtable, was a general discussion on investing in the Association of Southeast Asian Nations (ASEAN), with Lee Sook Yee, chief investment officer at Kenanga Investors; Dr. Tan Chong Koay, founder and executive chairman/ chief strategist at Pheim Asset Management; and Lim Suet Ling, executive director and CEO of UOB Asset Management.

The panel concluded that the wide disparity between the ten current ASEAN countries – in terms of income distribution, fiscal policy, market sophistication and infrastructure development – could pose a challenge to unifying the regional grouping on a single platform.

“There are plenty of opportunities, but in terms of regulation and policy, there’s a need to get our act together. With regards to the ASEAN-10, you have the very developed Singapore and Brunei, and the developing Indo-strategist China side. The difference in that is 50 years,” Ms. Lim remarked.