The immediate after-effect of the global financial crisis on fund managers looking to build their businesses in Asia was a significant slowdown among the region’s largest institutional investors in outsourcing equity portfolio management.
As global stock markets became ever more closely correlated and investors sought refuge in either less risky assets or in markets closer to home, international equity fund managers were compelled to put on hold plans to capture the longer term trend for outsourcing from Asian institutions. The result was a cyclical downturn in the institutional segment of the fund management industry. Greenwich Associates reported as much last year in a report claiming that global asset managers expected too much from Asia, with the potential client base smaller and harder to service compared with those in so-called ‘western markets’.
This year’s research paper published in June by Greenwich is far more upbeat about the industry’s prospects. The report, titled Diversification Efforts Triggers Outsourcing Boom, suggests this hiatus in the hiring of international managers is now over. A number of recent initiatives by various sovereign wealth funds across Asia are offered as clear evidence of this change.
These include plans announced in January this year by Korea’s National Pension Service to outsource a further $24bn and in March by Thailand’s Social Security Office to appoint three managers to each manage $200m. In June it was reported that the Public Sector Pension Fund in Taiwan outsourced a further $1bn to five international equity managers as part of its long-term programme to diversify investments, and it is but one of a handful of large pension funds outsourcing assets in Taiwan. As a result the hopes of many international firms operating in Asia have been raised and equity managers are once again focused on the outsourcing opportunity.
The question is whether this is simply a pick-up in outsourcing as institutions recover their confidence after being disappointed with performance during the global crisis, as the more recent Greenwich report suggests, or whether we are witnessing a structural shift in demand for outsourcing to international equity managers?
The case for a structural shift in behaviours and objectives is strong. Historically many Asia-based institutional investors, particularly central banks, have had an overwhelming preference for bonds, in particular for US dollar bonds. Whereas this strategy has played out particularly well over many years, the seeds of change are beginning to show.
Economic policy across the region has shifted dramatically since the financial crisis. Whereas before, most authorities in the region managed their exchange rates against the dollar seeking stability for their country’s exports, the post-crisis need to rebalance economies across Asia and promote domestic consumption has fuelled inflation. As a result currencies are now appreciating against the dollar as part of a number of measures introduced to rein in inflation.
At the same time, US dollar debt is no longer considered the safe haven it was and central banks and other institutions are looking to diversify away from the dollar and dollar bonds. There is even speculation that the Chinese currency, the renminbi, will ultimately rival the dollar as a reserve currency – at least for many of China’s trading partners in Asia. This has prompted institutions to consider other asset classes where potential returns are more attractive and currency exposure other than the dollar, resulting in greater outsourcing while many of the key sovereign funds in the region are accumulating assets rapidly.
China is a good example of rapid asset accumulation combined with economic policy that will drive continued diversification and outsourcing. The country is looking to gradually internationalise its currency, and as part of the reforms targeted to position the renminbi as an international currency the authorities are keen to encourage more investment offshore from both the public and the private sector. As China begins to ease monetary policy and lending conditions following a period of continued tightening, the outflow of funds from the mainland to international markets is likely to gather pace. The rapid increase of foreign exchange reserves in China to more than $3,000bn provides a ready source of funds to fulfil this policy.
Two main asset classes are likely to dominate the attention of Asian institutions as we enter this period of greater outsourcing: global equities and global emerging market equities. Beyond these broad allocations some of the larger sovereign wealth funds consider regional allocation and sector allocation. As the earlier Greenwich report concluded, servicing these institutions requires a different approach compared with servicing clients in Europe or North America. Managers with experience in the region are likely to be well positioned.
Mark Konyn is chief executive of RCM Asia Pacific, a company of Allianz Global Investors
Source:http://www.ft.com/cms/s/0/65b9a7ae-a7c4-11e0-a312-00144feabdc0.html#axzz1RlVfXn9Z
