In today’s rough bear market, safety is the only thing that sells.
By Assif Shameen
September 2002
Kim Teo made a name for himself in Singapore in the late 1990s by launching more than 20 new retail funds -- including everything from Internet to country selections. By 2000 First State Investments, his once-obscure local investment firm, had tripled its assets, to nearly $1 billion, and become the largest privately held retail fund house in all of Southeast Asia. After selling itself to Commonwealth Bank of Australia early that year, First State stumbled badly once the technology bubble burst. The 46-year-old Teo, who today heads AIB Govett (Asia), with more than $700 million in funds, misses the go-go era.
“The days when you could manufacture a new flavor-of-the-month fund and keep attracting the crowds in Asia may be over,” he says ruefully. “Unfortunately, these days just one thing sells in the region: safety.”
Like their counterparts around the globe, Asian investors -- both institutional and retail -- want to make sure their capital is preserved. It’s an understandable urge. The Asian financial crisis, Japan’s slow-motion decadelong decline and the flameouts of global tech, telecommunications and biotechnology stocks, not to mention weak overseas markets and the end of soaring Asian property prices, have all taken a toll. “Return of capital, rather than return on capital,” has become all-important in the past year or so, says Bruce Pflaum, who heads U.S. consulting firm Frank Russell Co.'s Asian office in Singapore.
To the keen disappointment of spirited equity entrepreneurs like Teo, the most popular investment products of the past year have been the most stable ones. One example of Asian investors’ new conservatism: The Hong Kong Investment Funds Association estimates that 84 percent of net retail flows in the first five months of this year went into so-called guaranteed or capital-protected funds, which invest most of their money in paper like zero-coupon bonds that will return all principal in two to five years. They put the rest into riskier assets, such as equities indexes or options strategies. An additional 5 percent of Hong Kong’s retail money was earmarked for bond funds, leaving just 11 percent for equity investments. That’s a marked departure from two years ago, when more than 85 percent of new money went into equities.
The move into fixed-income-based products isn’t just a retail phenomenon. As is evident in Institutional Investor’s 2002 Asia 100 ranking of the largest money managers in the region, bonds were the one bright spot in an otherwise challenging investment environment.
Overall, total assets fell from $6.27 trillion last year to $5.86 trillion a year later. (Excluding international managers, assets fell from $5.46 trillion to $5.06 trillion.) In Japan and Asia generally, Kampo, the Postal Life Insurance Department, with assets of $940.7 billion remains the largest money manager; in Australia AMP Henderson Global Investors is once again the biggest asset manager by a wide margin, while Hong Kong SAR Exchange Fund similarly outpaces its local rivals.
Everywhere bonds played a key role. On our roster, which calculates assets in U.S. dollars, Singapore’s NTUC Income Insurance Co-operative reported a 23.7 percent increase in assets, from $3.89 billion to $4.81 billion, with most of the gain coming from a 54.9 percent rise in domestic bond holdings. Kampo’s Asian bond holdings rose 6.2 percent in value in the 12 months through the end of March, helping to keep the fund manager’s overall assets nearly level with those of a year ago.
In many cases, though, bonds only cushioned the fall in overall assets. At international manager Barclays Global Investors, total Asian assets (those invested in and sourced from Asia) plummeted from more than $94 billion in 2001 to $65.6 billion in 2002. Why? Equity investments dropped 35 percent; bond and cash levels rose, but not nearly enough to offset the shortfall. State Street Global Advisors became the largest international manager.
If extreme, Barclays’ experience was hardly isolated. In Japan, for instance, in dollar terms 17 of the 25 largest firms on this year’s Asia 100 suffered asset declines, led by Daiwa Securities Group, which was down $37.9 billion. In Hong Kong two of the three largest funds got smaller. Investment firms in Australia, India, Malaysia, South Korea, Taiwan and Thailand generally fared much better than their compatriots in some of Asia’s larger markets. In South Korea, for example, National Pension Corp. registered a 25 percent asset gain.
Even in some of Asia’s stronger markets, investors have developed a keen interest in capital preservation funds, and that’s not necessarily bad for asset managers. Although fees are about half those of equity funds, they are well above the levies on straight bond funds. Typically, there is a 2.5 percent sales charge on top of a 1 percent annual management fee. Revenues at Singapore-based DBS Asset Management, the investment arm of DBS Bank, have risen sharply in the past year, says chairman Seck Wai Kwong. “Almost all of the new money is coming from small first-time retail mutual fund buyers,” he says. In 2002, he explains, DBS’s product mix leans toward the dozen or so kinds of guaranteed capital funds that have become popular in the city-state.
Because capital preservation and other stable, income-generating products are similar to bank deposits, they appeal to Asian savers, who have traditionally resisted riskier investment funds. Savings and other types of bank deposits remain one of the great treasure troves of Asia. In Japan some $2.1 trillion resides in postal savings accounts; in China an estimated $1 trillion sits in bank household savings accounts. Investment managers would dearly love to shepherd this money into funds.
They are having some success. A recent Hong Kong IFA survey found that 63 percent of investors in guaranteed funds were first-time fund buyers who were raiding their low-yielding bank savings accounts to make their purchases. A typical Hong Kong deposit account offers 0.25 percent in interest, so holders of such accounts make attractive targets for asset managers.
At DBS, Seck says, many bank customers are shifting fixed deposits into investment products. In all of 1998 DBS sold just $37 million of unit trusts through its branches, he notes. This year, he says, “we sell more than that in a week.” One catalyst in the transition: DBS has increased its incentives for branch staffers to cross-sell banking and investment products.
The appeal of these products extends to Japan, where savings accounts typically yield less than 1 percent. Citigroup Asset Management, which now oversees $20 billion in Japanese retail mutual funds, grew its business by 37 percent last year and is outpacing that rate so far this year, says Alan Harden, head of CAM’s Asia-Pacific retail group in Tokyo. “Japanese retail investors are buying mainly short-duration income products or monthly distribution fixed-income funds,” he says.
Still, risk-averse local and foreign investors have missed an opportunity in Asian equity funds. While the U.S.'s Standard & Poor’s 500 index had declined more than 27 percent through early August and the Dow Jones Euro Stoxx 50 index had lost more than 29 percent, the MSCI Asia free index was up 2 percent. Certain local markets have done much better than that.
Investors may become more willing to take on measured risk. Philip Gardner, who runs Goldman Sachs Asset Management’s operations in Asia, notes that an increasing number of his firm’s clients are using a total return strategy that balances hedge funds with more-conservative investment products. “If there is one thing that stands out in Asia over the past year, it is the growing interest in hedge funds, which weren’t part of the landscape three years ago,” says Gardner. His firm provides access to a number of hedge funds, mostly through funds-of-funds.
Citigroup and ABN Amro Asset Management have both recently launched Asian hedge funds available to high-net-worth and institutional investors. “We target absolute returns while maintaining low volatility and low correlation with equity and bond markets,” says Bo Kratz, who heads ABN Amro’s Singapore asset management group.
Eureka Hedge Advisors of Singapore, which collects data on the industry, estimates that there are now 170 registered hedge funds in Asia, handling nearly $14 billion in assets. Most of the activity to date has been in Australia, Japan and New Zealand. As the number and variety of Asian hedge funds expands, says Gardner, interest will grow, particularly if the markets remain highly volatile.
These shifts in investor interest are occurring in the midst of a major competitive struggle for primacy among Asian financial centers. “Throughout developed Asia -- Japan, Hong Kong, Korea, Singapore -- governments are continuing to liberalize the investment management business,” says Frank Russell’s Pflaum. As Asia grows and adapts to China’s huge and increasingly forceful presence, every country wants to attract capital and ensure its future growth.
In some areas the competition is particularly stiff. Singapore this year gained ground on its fierce rival, Hong Kong. According to figures from the local governments, assets under management in Singapore grew by 11 percent, to $177 billion, last year, while those in Hong Kong fell slightly, to $190 billion. Hong Kong retains its commanding lead in retail funds, at $19.8 billion to Singapore’s $6.1 billion. Even there, though, the gap is narrowing: Hong Kong’s retail fund figure dropped 22 percent last year because of redemptions and asset declines, while Singapore’s rose 35 percent.
South Korea, meanwhile, is flourishing. Already the biggest mutual fund market in Asia, Korea is benefiting from successful financial deregulation and a booming economy. Andrew Fay, CIO of Deutsche Asset Management (Australia) in Sydney, says his firm has just received an investment trust license in Seoul and is aggressively expanding. “We are doing fixed-income products for life insurers; we are looking to roll out equity products, retail funds, the whole works. It’s an exciting market.” Notes Goldman’s Gardner: “It’s one market in Asia where you can grow your business phenomenally over a relatively short period of time. There are opportunities both at the retail and institutional level.”
Similar jostling is under way in Shanghai. In July SG Asset Management signed a joint venture with China’s Fortune TIC to try to tap into China’s massive savings funds. SG’s foray follows similar deals by Crédit Lyonnais, with Xiangcai Securities; and BNP Paribas, which tapped Changjiang Securities Co. as its joint asset management partner. More Sino-foreign joint venture deals are expected in coming months as China gradually opens its financial markets.
In virtually all of these markets, foreign and domestic firms are vying to handle a portion of Asia’s burgeoning pension business. Singapore’s Central Provident Fund, for example, will likely award close to $37 billion of its $49.9 billion to mutual funds before long. “Individuals are taking increasing responsibility for their own retirement funds” through the growing array of private fund options, says Pflaum, who compares the current state of the Asian pension industry to that of the fledgling U.S. marketplace in the 1970s or Australia in the 1980s. Hong Kong, Japan, Singapore, South Korea and Taiwan have all begun to parcel out money from their public pension funds to local and foreign funds. India, Malaysia and Thailand are expected to tread the same path within the next year or two.
Ever the optimist, AIB Govett’s Teo says the Asian asset management business will explode as the population ages and private pension programs gain traction. The forces driving pension reform, he says, are irreversible. “Asians are still saving, and those savings are increasingly being channeled into better-yielding investments” such as guaranteed funds, says Teo. Of course, he just wishes they would channel more of them into stocks.
