Talking shop

31 December 2013   Category: News, Asia, Hong Kong   By David Macfarlane

Asia Asset Management’s 18th Anniversary CEO Roundtable proved to be a lively and sometimes heated affair. Five CEOs from Asia’s asset management industry attended a two-hour lunch session in Hong Kong’s plush American Club where some dynamic deliberation and dialogue ensued.

The moderator for this session, Asia Asset Management’s Publisher Tan Lee Hock, set the ball rolling by asking Dr. Au King-Lun, chief executive officer at BOCHK Asset Management, how he sees the growth of the Asian fund industry, as an experienced provider in this part of the world.

As Dr. Au sees it, global asset management will form three major centres, or industry sections: North America, Europe, and Asia. “I think, ultimately, that would be the ideal development,” he said.

Mr. Tan pointed out that Asia is a very fragmented market, and each market has its own nuances, rules and regulations. As such, he asked, is it possible to build an effective asset management industry in the region?

Emil Nguy, founding partner and chief investment officer at Income Partners Asset Management (HK) Ltd, responded first; he explained that building a financial industry is very different from managing money, mainly because of the distribution aspect. “I think they [Asian countries] can form an agreement, and distribute as a function of that – which is fine. It then gets down to the distribution capabilities in each market, which isn’t necessarily an impediment as each country already has its own distribution network.”

Akinori Han, managing director at DIAM Asset Management (HK) Limited, gave his thoughts on the progress of asset management in Asia from a Japanese perspective. He said: “In terms of equity, we have already seen lots of Japanese retail investors investing in Asian equities. But when we come to bonds, yes there is some, but there are still a lot of impediments. There are a number of government initiatives, like the Asian bond market initiative under the ADB. They are trying to address each issue, like fragmented settlement systems, or the regulatory restraints, with some government commitment. With these impediments being gradually lowered, I think it is only a matter of time before Japanese retail investors start investing in Asian bonds.

The discussion moved onto regional passport and reciprocated fund recognition arrangements, such as the Australian initiative covering Australia, Singapore and Korea. There is also the ASEAN initiative, with, so far, only three countries: Singapore, Malaysia and Thailand. Additionally, there is the much-vaunted Hong Kong and China relationship. But Japan doesn’t seem to be part of any passport arrangements so far.

“Japan is not a part of any passport arrangement now but as more bilateral relationships develop in the region, I believe there will be stronger incentives for Japan, especially with the countries which are geographically close, to seriously consider their own version of a passport arrangement,” said Mr. Han.

On mutual recognition between Hong Kong and China, Terrance Hui, chief executive officer at Invesco Great Wall, said: “If mutual recognition is implemented, then a lot of our Chinese funds can be sold in Hong Kong, whereas Chinese investors can already access the funds available in Hong Kong through the QDII scheme. From my perspective, it is good for the fund management industry in China. I think China stands to benefit most from the arrangement.”

Passive instruments

On the topic of exchange traded funds (ETFs), Julian Tsung Sheng Liu, president and chief executive officer at Yuanta Securities Investment Trust Company, a major ETF provider in Taiwan, explained there are roughly 200,000 ETF investors at the moment in the island state, out of an investing population of more than two million stock pickers.

“The penetration ratio is quite low,” he noted. “So you will see migration from traditional stock investors to ETFs, or the other vehicles like warrants and non-traditional equity types of product. ETFs account for only 1% of daily turnover, which is the second lowest after Japan. I think if different types of ETFs are introduced, such as foreign ETFs and more exotic products, these will help bolster the market.”

Inevitably, the active/passive debate cropped up.

“I think Japan is generally turning to the passive side,” said Mr. Han. “To encourage more individual investors’ participation in the equities market, the government is going to introduce NISA, a Japanese version of individual savings accounts, next year. By investing in equities through such accounts, investors will be able to enjoy capital gain tax exemption. Securities companies in Japan are competing to attract more individuals opening NISAs. As more individual investors start to invest in equities, they will be more cost conscious, and definitely ETFs will provide cost savings. From this point of view, more individual investors are likely to invest in ETFs. Institutional investors are starting to scrutinise whether the fees paid for active investments are really worth it or not.”

In regard to Asia as a whole, Mr. Nguy said: “I think the trend is towards passive. But I think there’s always a role for active. As to what’s the right balance, I think I’d refer to the US.”

In terms of China, Mr. Hui pointed out that since 2009, investors have been moving from index funds to ETFs in swathes. “There has been astronomical growth in the past few years and this seems set to continue. ETFs are all very liquid from a turnover point of view but the bulk of them are really just equity-related. They are all very similar in terms of returns. There isn’t really much in the way of differentiation; there just isn’t enough variety. But further down the line we will see different types of ETFs emerging.”

Dr. Au added: “After the global financial crisis, investors demanded transparency and liquidity. I think ETFs addressed both these issues head on, and that’s probably why some of the active fund houses have tried to develop ETF businesses.”

Asian bonds

The next topic on the agenda was Asian bonds. Mr. Tan asked the participants to give him their take on where we are today, compared with when they were first conceived 20 year ago.

Mr. Nguy said it’s a very interesting class to buy: “It really is a great currency product because the domestic credit market is still very small. These are mainly government bond markets where you have to take into account domestic interest rate cycles and currency risks. You have ten different economies all going at different paces; so as an asset class basket, it’s very interesting.”

Mr. Hui noted that China’s bond market only accounts for just over 10% of AUM, so there is tremendous room to grow, especially when the market normalises: “Investors in China are looking for income-type and bond-type products,” he explained. “But they are also wary of bonds sparking systemic risk, which they will probably become used to over time. There are still a lot of opportunities for China bonds to succeed.”

According to Mr. Han, there has been strong demand in Japan for income gain. He said: “Investors had been investing in the so-called high interest rate bonds of G7 countries. But with the decline of interest rates in those jurisdictions, they have turned to other high interest rate products, including Asian local currency bonds. When investing in Asian local currency bonds, tools for hedging interest rates and forex are essential. I think this would apply to investors in any country, but it is especially the case with Japanese investors due to substantial appreciation of the yen over the last two decades.”

Asian equities

Mr. Tan next prompted the roundtable CEOs to give their thoughts on the major milestones that Asian equity markets have achieved.

Asian equity has gone through a lot of phases, as Dr Au pointed out. “First, we had the Asian crisis, and then we made a strong recovery. I think going forward there will be a lot of challenges, with China getting more recognition from global investors; so I think people will focus more on China equity than just Asian equity.”

Speaking as a bond manager, Mr. Nguy said: “From a macro perspective, I’ve been asked many times why is China growing at 10%, yet the equity market nowadays is flat-lining. I have a defined view. The way I look at it is: China is a socialist economy trying to transform into being a capitalist economy.”

And Mr. Liu added: “You see the daily turnover in mainland China, Taiwan, Hong Kong going down 40% or 50% – people don’t want to invest in equities because they don’t have the money to do so. People have been rebalancing their investments from equity to fixed-income. Now they treat equity like fixed-income and treat fixed-income like equity, especially in Taiwan.”


In Japan, it seems a lot of buying actually comes from overseas as opposed to from domestic investors. “So why are Japanese people not investing?” Mr. Tan enquired.

In recent years, the Japanese equity market has tended to be driven by non-Japanese investors, explained Mr. Han. “Therefore, some Japanese investors have paid special attention to how foreigners operate and have followed their movements. This year, however, the number of Japanese retail investors has increased and their flows into the Japanese stock market have been one of the key factors that have upheld the market.”

Dr. Au observed: “What is interesting is Japan is a very rich country, and the money is in the hands of the people and not the government. What Abe is trying basically to do is encourage people to spend, and I think he’s got the appropriate policies. The question is whether he implements them successfully.”

“I don’t know particular stocks in Japan, but I do think Japan, if it wants to sustain economic growth, needs to deal with the demographic issues. The country probably needs to open up its immigration policies, and also somehow find a way to really spur domestic consumption further,” added Mr. Hui.

Pension developments

On Hong Kong’s MPF scheme, Dr. Au claims it has allowed Hong Kong to develop its trust business. “Even if the assets are small by national standards, at least we have the framework established. The MPF is now playing a more strategic role because a trust business has been established and it’s proven that it works. But why can’t we expand that to cover retail funds, or other investment assets domiciled in Hong Kong?”

When it comes to Taiwan pensions, Mr. Liu says the regulator feels a duty towards the locally domiciled fund industry. “We are doing something like the MPF in Hong Kong, and the EPF in Singapore, with local domiciled funds; but for pension funds only. Some participants will be foreign-based companies, but the funds will be locally domiciled. This platform is expected to launch next year, although there’s a lot of political uncertainty. When it does happen it will be a remarkable milestone for Taiwan’s pension funds.”

In regard to China’s enterprise annuity and pension markets, Mr. Hui says there are not enough and the country’s three-pillar pension system is inadequate. He added, however, that the government was moving in the right direction by disclosing problems and expressing a willingness to discuss reform.

Winners and losers

Mr. Tan’s final question was: “Who are likely to be the winners and losers over the next three, four, five years?

Dr. Au said: Brand is very important in Asia, and so the big boys continue to enjoy their competitive advantage. What I hope to see is people recognising performance more, which can be achieved partially through investor education and partly through widening distribution channels. I think that is important, and will be critical for the industry – having broader distribution channels than just banks.

In Mr. Liu’s opinion, local players with large distribution channels, in terms of holding companies, such as very big wealth management banks, will be the winners on the retail front. “Locally branded Northeast Asian and Southeast Asian firms, for example banks with their own asset management capabilities will do well, even in Mainland China. But on the institutional side, I think global brands still have a competitive advantage in terms of pension solutions, government mandates, and insurance mandates.

Mr. Hui made the point that Invesco Great Wall is in the people business. He said: “The most important thing is to be able to attract good people, and also retain them. We also need to maintain a good corporate culture, always prioritising the interests of our investors, employees and shareholders. We need to be vigilant about maintaining the right balance, and creating a culture that encourages innovation and hard work.”

Mr. Nguy contended that multinational firms have a clear advantage by their sheer size. Whereas in Asia, in an open economy like Hong Kong, there’s no protective policy to nurture Hong Kong growth. He went on to say that homegrown companies have their work cut out for them in order to thrive, or even survive. He did add, however, that new opportunities are emerging for them in the bond market, especially with local bonds.

The big players with a wide range of products will definitely have an advantage, Mr. Han concurs. “For the small ones, they need an edge. And that’s most important. Though people tend to overlook them, governance and social responsibility investments are becoming more and more important. The more sophisticated, established institutional investors are looking increasingly into the governance aspect. Any form of scandal, big or small, can be enough to trigger them cancelling the mandates given, transferring the money to others. For example, last year Japan’s biggest pension fund cancelled a number of asset management contracts because of insider trading. So it’s vital to make sure that the company’s governance is well organised; and it’s also prudent to commit to being a socially responsible investor.”