Many people will not look back on 2002 fondly, as the year has been marked by economic stagnation and political volatility. From ongoing deflation to Japanese economic malaise, from the threat of an American invasion of Iraq to the horrors of the terrorist bombing in Bali, this has been a year most of us would prefer to forget.
But grim tidings are not called for in the specialized universe of investment management in Asia. Here business has been tough but the trends have been positive. Top-tier Asian institutions are becoming more sophisticated. Governments are deregulating. The onslaught of global ageing is forcing savers to become investors. The financial crisis is now more than five years behind us, and Asian economies and companies are emerging stronger than ever. So on to our top-10 stories...
1. Opportunities abound in South Korea.
Nowhere are these trends truer than in Korea. The spring edition cover story of PensionsAsia magazine highlighted how the cream of Korean institutions, starting with the National Pension Corporation and Samsung Life, is forging a new path that will set the mould for other organizations. The NPC has mandated Watson Wyatt to help it make its first offshore investments, while insurance companies such as Samsung have spun off and professionalized their fund management teams.
The response has been a rush by global fund managers and insurance companies to get a piece of the action. The success of Templeton and Schroders' onshore businesses has proven that Korea can be a lucrative market, if it is handled right. Deutsche Bank became the next big player wholly owning its investment trust management company thanks to its acquisition of Scudder, while Credit Agricole created a joint venture with the Agricultural Credit Cooperative. BNP Paribas forged a JV with Shinhan Bank while Morgan Stanley agreed to buy Kookmin's fund business. Other fund management firms, meanwhile, have eagerly circled and continue to figure out their Korea strategy. Getting this right could determine the region's winners and losers for several years to come.
2. Ups and downs at the National Council for Social Security Fund in China.
The National Council for Social Security Fund, which now has some $9 billion of assets, has been in the news. First the bad news: how to fund it? Chinese pension reform remains a mess, with Liaoning struggling to get its project running. Moreover, the government killed the most promising means of financing its pension problem, siphoning a portion of IPO proceeds to the NCSSF. Now it looks as though the fund will be given shares in state-owned companies and made to sell these itself. Hmm.
On the plus side, however, the organization is making swift moves to establish itself. It hired a spate of advisors, including Principal Global Advisors, Quebec pension fund-cum-consultant CDPQ and Northern Trust. It could be ready to outsource assets to domestic fund managers by next year, although offshore mandates aren't expected for some years, a move that may first require China to establish a Qualified Domestic Institutional Investor framework. But now that a Qualified Foreign Institutional Investor process is being introduced, who knows?
3. Fund management JVs launch in China.
Few stories have generated as much buzz - although generating profits remains to be seen. Hopes presumably rest less on the retail market than in gaining access to institutional mandates (see Story No. 2, above). After last year's successful launching of open-ended mutual funds, 2002 was the year that the China Securities Regulatory Commission finalized rules on allowing Sino-foreign JVs in fund management.
The twist was that existing domestic fund managers refused to sell stakes in their lucrative businesses or relinquish management control, meaning the initial deals have been with local securities firms to set up brand new fund management JVs. Allianz Dresdner and Guotai-Junan Securities, and Invesco and Great Wall Securities, were the first ones given preliminary approval, with SG and ING just behind. Market players still believe a few JVs will be cut with Chinese fund management companies, but if so it will be 2003's story: JF and Huaan, where are you?
4. Hedge funds go retail in Hong Kong.
Finally, something to write about other than guaranteed funds. Thank you, Securities and Futures Commission! The SFC passed the rules, and recently JF Asset Management and HSBC launched the first hedge funds authorized for retail distribution. Although these won't generate the volumes of guaranteed funds, this move has demonstrated a few things. One is that hedge funds as an asset class are here to stay in Asia. Two is that the SFC is skilfully ensuring that Hong Kong remains the region's fund management hub. (MAS take note: you have to make the rules flexible enough so people actually can afford to buy them.)
The downside to this story is that institutions in Asia are still wary of hedge funds and alternative investments in general. The Jockey Club of Hong Kong this year became the first and still only Hong Kong pension fund to experiment. Outside of Japan, where the plan sponsors are going bonkers over hedge funds out of desperation, only a handful of really world-class organizations like Samsung Fire & Marine are keeping with the global trend. Everyone, plan sponsors and providers, says institutions are 'interested' in alternatives. Maybe in 2003 they'll put their money where their mouth is.
5. UTI breaks up.
It may not have been the perfect Bollywood ending to the all-singing all-dancing Unit Trust of India, but we'll take it. A monster is being split up, the show is in its final act. UTI dominated the $22 billion mutual fund industry, and its demise will accelerate the already-fast growing private sector. Meanwhile the government this year began privatizing pensions provisions, enticing players such as Tata AIG to enter the field. India is beginning to reach the point where its market size can translate into good business, and we hope to report good things next year.
6. Banks sell variable annuities in Japan.
The VA issue in Japan is a hook for me to hang my hat on, because it's the biggest headline in the whole bancassurance phenomenon, which is becoming truly powerful in Asia. In fact all the lines between fund management, banking and insurance are blurring, everywhere. In Korea a new law is allowing bancassurance for the first time, while in Taiwan, financial holding companies are being established (although the first ones excluded asset management arms, perhaps in a bid to sell them). In Singapore, bancassurance is threatening to topple the traditional life insurance giants using sales forces.
But in Japan this is especially big news. Variable annuities have only been around for two or three years there, and it is hoped that the bank channel will provide the oomph to make them a real hit. Lord knows retail mutual funds have been a flop (see Story No. 8, below), so maybe VAs will work. VAs are confusing and complex, so by getting banks to push them, it creates an impetus for establishing real financial advice, which Japan (and the rest of Asia) dearly needs.
And this segues neatly into...
7. Bank distribution takes off.
The other pea in the pod. I thought it worth noting that outside of the merging between banks and insurance companies, banks are coming into their own as distribution hubs for fund managers, from Japan to Korea to Taiwan. They have long since dominated Hong Kong and Singapore, but elsewhere in the region, fund managers had been left to the mercy of brokers. And brokers, as we all know, are commission-greedy churning machines. Or so the banks lead us to believe. Nonetheless, banks do have a different agenda, one of asset gathering, and make more stable partners for fund managers.
Korea has seen the biggest changes. In Korea the brokers and fund managers have been separated while the banks have been reinventing themselves into consumer-oriented lenders looking for fee-based business. Even in Japan, banks have surged into territory once dominated by the big three securities companies. Cerulli Associates predicts that in four years, the majority of fund sales in Asia will be through banks.
Citibank has been the leader and prime beneficiary throughout the region. It has demonstrated to regional and local banks how to do it. New fund management houses entering Asia such as Janus and Pioneer have gone straight to Citi as their first stop, bypassing the painful country-by-country distribution arrangements that were required in the recent past.
8. Japan disappoints. Still.
Yeah, I had to mention it. It's a cheap shot, picking on Japan - but I'm not above that sort of thing. It was this time last year, as I was about to pack my bags for my Christmas holiday, when Merrill Lynch pulled the plug after losing $200 million on its acquisition of Yamaichi Securities. And it just got worse, as the Enron disaster from last November led early this year to all but destroying Japan's poorly run money management funds industry.
Of course, the launch of defined contribution was supposed to make everything rosy, right? Another government screw-up. The regulations and tax treatment on DC and on reforming other aspects of the pension system are so weak, and the bureaucrats at the Ministry of Health, Labour and Welfare so pedantic about approving new DC plans, have made the whole thing a joke.
Everybody keeps telling me how great their business is gonna be when the stock markets turn around. I'm sure that's true and I hope you're ready to ride out the next 13 years, because we're only halfway through the post-1989 bust, folks. (OK, I'm paid to be a journalist, not a forecaster, but there's my two cents anyway.)
It's not all gloom and doom. The institutional business is as healthy as ever, as pension funds become more willing to experiment with notions such as picking managers based on performance, not keiretsu relationships, in order to generate returns. The sheer size of the savings pool not invested in capital markets is still attracting players to Japan, including Mellon Financial, which formed a JV with Shinsei Bank, AMP which took a brave punt on DC, and Bank One. But client servicing remains costly.
Meanwhile corporations are appealing to the government to take back responsibility for much of their pension obligations, shrinking the corporate pool. Doing fund management the old way, trust banks and insurance companies are out, specialist mandates and performance are in. It's a market where a few good players can excel. The rest are going to learn what suffering is all about.
9. Singapore begins to reform the CPF.
Things are sleepy in the Lion City. Every time I go there, people tell me how slow it is. Boat Quay is dead, Muhammed Sultan is dead. Well, it was clearly time to shake things up, and the government did that, with its Economic Review Committee. It made some major recommendations to keep Singapore a pre-eminent force in global asset management, as well as to change how the Central Provident Fund operates. The recommendations weren't as sweeping as they could have been. The government isn't about to reform CPF to the extent it loses control of this social lever, nor make it transparent. But it is going to establish a 'low-cost private pension provision' for CPF assets.
What exactly that means won't become clear until next year, but the wheels are in motion to create a more efficient and cheaper method for members to invest their CPF money. This could result in one or a handful of big 401(k) administrators creating a nice business, provided they get sufficient guarantees that a lot of citizens give them their savings.
Meanwhile the government has also scrapped its hub-and-spoke requirements, allowing offshore managers to offer their Luxembourg or Dublin line of mutual funds directly to both the cash market and to CPF members. Such moves have stimulated a few new entrants such as Morgan Stanley into the retail market. I don't know if Harry's Bar is going to become party central, but the ERC's making a start.
10. Deutsche Bank exits custody.
Deutsche has sold its custody business to State Street for $1.5 billion. Now size matters in a lot of businesses. Custody just takes that maxim to a ridiculous level. Deutsche had over $4 trillion of assets warehoused, with some top clients around the world, including the GIC and Nippon Life - and they still couldn't make a profit. Whether State Street will recoup its investment remains to be seen. Rivals report seeing a lot of Deutsche clients sending out RFPs. No wonder, then, that even the remaining behemoths like State Street are making big pushes in Japan and elsewhere for their value-added services, such as currency overlay, outsourcing and transition management.
The bottom line is that 2002 was a tough year, but in our industry, a lot of groundwork has been laid. I think 2003 will be a better year. Whether you've just finished your Ramadan fasting, are lighting the Chanukah oil lamps or getting ready to trim the Christmas tree, I hope you have a happy holiday season and let's keep in touch next year.
