State Street says it is capturing the majority of assets Asian institutions are investing internationally primarily via its securities services, trading and research businesses. In particular it is targeting global fund management companies who are managing most of these institutional monies to outsource their back and middle offices, says Jay Hooley, Boston-based executive vice president. He expects volumes only to increase, driven by pension reform across the region,
"New products and markets means managers need new platforms," he says. "Pension reform will drive this."
Now State Street is opening a rep office in Beijing, to position it to take advantage of the available assets emerging from China. There is little direct business to be had for now. China's embryonic corporate pensions (enterprise annuities) has yet to get off the ground and will remain a strictly domestic game. Similarly, the National Council for Social Security Fund, although using State Street and State Street Global Advisors for assistance in establishing its asset management strategy, is not yet open to foreign institutions for business.
There is, however, a Chinese institutional community. The biggest of course is the State Administration of Foreign Exchange, with over $650 billion of reserves. The large insurance companies such as China Life and Ping An Life have money from Hong Kong IPOs, as well as foreign currency-denominated policies. That money, totalling $9.7 billion of foreign assets (of which $7.8 billion is available for overseas investments) is currently sitting in the bank, but industry executives believe that the insurers are now in the process of selecting global custodians and foreign fund managers to manage part of their offshore proceeds.
The National Social Security Fund has been talking about investing abroad for several years. China-based fund managers say it may also take concrete action this year, now that it has domestic outsourcing experience. State Street believes it will outsource $1 billion overseas in the coming year or so.
China's big commercial banks also have substantial foreign reserves, although these tend to be held in foreign depositories or with the central bank, and what foreign securities they own are held to maturity, to avoid any trading losses.
And while enterprise annuities and other aspects of pension liberalization remain off limits to foreign providers, Hooley says one day foreign players may be allowed to participate, or pension money be allowed to be invested overseas. "For now it's a one-sided street, but it's too big to ignore," he says.
Although State Street believes in the medium or long term, China is critical to its business, for now prospects are mainly to be found in Japan and Australia; the former because of the sheer size of its institutional investors, which are increasingly using external fund managers, the latter because of its sophistication.
"In a low-return investment environment, clients are acutely aware of their cost profile," says Hooley. He argues that services such as securities lending, low-cost execution and research to help optimize asset allocation are of increasing use to institutions and to investment managers worldwide.
Some investment houses, seeking to access new markets and keep up with evolving technology needs, are opting to outsource much of the work to providers such as State Street, allowing it to indirectly benefit as Asian governments introduce new pension schemes and allow their institutions to diversify investing abroad.
