They say a rising tide lifts all boats, but don’t tell that to Asian fund managers.
The stunning rebound in Asian stock markets this year has failed to benefit most of the region’s fund managers. Although major market indexes have made up a good part of the ground lost in the bear market rout of 2008, most investors are still licking their wounds from last year’s declines and have stayed on the sidelines this year.
“Investors are somewhat shell-shocked and finding it hard to come out of their burrows and write checks,” says Paul Smith, CEO of Triple A Partners, a Hong Kong–based seeding platform for hedge funds. “There have been no new allocations to speak of coming into Asia.”
Most big international firms, which suffered some of the biggest asset declines, relate a similar story. Assets under management of the Asia 100, Institutional Investor’s annual ranking of the region’s biggest money managers, declined by 11.8 percent, to $9.7 trillion, in 2008. ING Group, the Dutch banking and insurance group that is the third-largest international manager of Asian assets, saw its assets under management tumble by 25 percent last year, to $121.3 billion. Assets have been roughly flat so far in 2009 despite the bounce in equity markets, says Grant Bailey, the firm’s Hong Kong–based regional general manager for Asia. “Clients are still quite wary,” he explains.
Many other firms saw their assets take even bigger hits. J.P. Morgan Asset Management saw its Asian assets fall by 35.3 percent in 2008, UBS Global Asset Management reported a drop of 42.3 percent, and Fidelity Investments experienced a plunge of 51.4 percent, or $110.1 billion.
“Even though markets have stabilized to some degree, the situation now is different to that of two years ago,” says Christof Kutscher, Hong Kong–based head of UBS Global Asset Management in the Asia-Pacific region. “The appetite for risk among clients has decreased and, indeed, aversion to risk has increased substantially among both institutions and retail investors.”
The cautious attitude is easy to understand. Money had poured into the region in 2006 and 2007 as markets caught on fire. Even after the outbreak of the subprime crisis in August 2007, many investors believed for a time that Asia’s markets — and economies — had decoupled from those of the U.S. and Western Europe.
A massive sell-off in Asian markets dashed any illusions of decoupling last year, however. The MSCI Pacific index, which includes stocks in Australia, Hong Kong, Japan, New Zealand and Singapore, fell 37.9 percent, in dollar terms, in 2008; China’s benchmark CSI 300 index was even more volatile, plummeting 66 percent, in local currency terms.
Asian markets have snapped back smartly this year. The CSI 300 was up 76.2 percent for the year to late August, while the MSCI Pacific index was up a more modest 15.2 percent in dollar terms. That bounce leaves investors with a dilemma: Should they stay put, having missed the rally, or should they pile back into Asia in the belief that the gains so far represent just the first stage of a prolonged upswing?
“That’s what everyone wants to know,” says UBS’s Kutscher. “That’s the $64 billion question.”
Some managers claim to see signs of a turnaround in sentiment. J.P. Morgan’s investor confidence index, which is based on a quarterly poll of retail investors in Hong Kong, rebounded to 119 in June from 95 in March; a value above 100 reflects a positive outlook on the market.
“We interpret the rise as evidence that investor confidence in Hong Kong has bottomed, not that it has fully recovered,” says Ken Tam, head of the Hong Kong business of J.P. Morgan Asset Management.
It’s also worth noting that despite the big hits that many players suffered last year, some segments of the industry have held up better than others. Big index-based investment managers experienced relatively modest declines in assets in 2008, with Barclays Global Investors and State Street Global Advisors, the two biggest international fund managers in the region, down by 18.7 percent and 14.9 percent, respectively. Industry sources say they benefited from having a preponderance of institutional investors, who were less inclined than retail players to sell when regional markets tanked.
Japan’s fund management behemoths also registered relatively modest asset declines. Japan Post Insurance Co. (Kampo), the post office life insurance outfit that is the country’s largest fund manager, saw its assets drop by just 3.1 percent, to $1.08 trillion, in the 12 months ended March 31, compared with a 35.3 percent decline in the Nikkei 225 index over the same period. Nippon Life Insurance Group’s portfolio shrank by 4.2 percent, to $519.6 billion. Many international firms regard the big Japanese players as stodgy for their heavy investments in Japanese government bonds, but those holdings helped them avoid big losses, industry sources say. One notable exception to the trend is Diam Co. The outfit, a joint venture of the country’s fifth-ranked fund manager, Dai-ichi Mutual Life Insurance Group, and No. 11 Mizuho Financial Group, reported a 23.7 percent drop in assets in the 12 months ended March 31, to $68.6 billion, which company executives attribute largely to declines in its equity holdings.
Notwithstanding the market turbulence and shaken nerves of the past year and a half, many Asian fund managers find grounds for optimism in the economic rebound taking place in China. Beijing’s massive 4 trillion yuan ($585 billion) stimulus program has pushed the growth rate back up near 8 percent and raised hopes that the country can lead a global recovery. Many observers believe that economic dynamism is bound to provide plenty of investment opportunities.
Joseph Zeng, head of the Hong Kong office of Greenwoods Asset Management, a Shanghai-based fund manager, believes that rising corporate earnings will generate returns of 20 to 30 percent for H-shares, or Hong Kong–listed shares of Chinese companies, over the next 12 months. The firm’s $160 million Golden China Fund posted a return of 112.3 percent during the first seven months of this year.
Other managers are wary about the Chinese market outlook after the sharp gains so far this year but see solid prospects for growth elsewhere in the region. UBS Hana Asset Management Co., a joint venture between the Swiss bank and South Korea’s Hana Financial Group, slips two places in II’s ranking, to No. 12, as assets fell by 45.1 percent in 2008, to $12.2 billion. But assets rebounded by 33.6 percent, to $16.3 billion, as of July 31, as investors seeking stability amid equity market volatility flocked to the venture’s core fixed-income and money market products. “In the last nine months, we outgrew the market,” says UBS’s Kutscher.
Regardless of the short-term outlook, most managers remain bullish on the long-term prospects for Asian markets and the asset management industry.
AMP Capital Investors, the No. 3–ranked Australian asset management group, saw its assets shrink by 22.9 percent in 2008, to $52.8 billion. The company has also been disappointed by the weak demand for its new Asian Giants Infrastructure Fund, which will focus on investments in China and India. The fund raised only $95 million from investors last year, but executives still aim to grow the fund to $750 million by 2012, believing that investors will be drawn to the long-term growth potential of those two economies. AMP hopes such new products will help the firm “work toward our goal of becoming an Asia-Pacific powerhouse,” Clarke says.
Triple A Partners’ Smith is similarly upbeat about the long-term health of Asia’s fund managers. “The world’s wealth is definitely coming this way,” he says.
See the rankings of Asia’s 100 Biggest Money Managers.
