Manulife centralizes Asian investment in Hong Kong

Manulife Funds Direct has taken over a HK$12 billion portfolio from its London office. The first test, says CEO Ron Otsuki, is for all the funds to outperform the average on the Watson Wyatt survey.

Q: Why set up an Asian investment office in Hong Kong?

A: Our stand-alone Asian portfolio used to be managed out of London. But we're in the process of transferring from London more than HK$12 billion ($1.54 billion) worth of assets that are predominantly from the insurance operations. Hong Kong is the fastest growing division of our company. With the coming MPF (Mandatory Provident Fund) market, there is a greater need for us to get closer to our customers and the markets that we invest in. This office will oversee the asset management of the insurance businesses in Hong Kong, China, Taiwan, Indonesia, Singapore, Vietnam and the Philippines. The main reason for us to centralize all our Asian investment in Hong Kong is economy of scale - we don't have to set up separate administrative functions. Also, in the investment community, communication is the key. This arrangement will allow good communications between our fund managers. We've got four portfolio managers, two more will be coming. In total we'll have 17 staff, including myself.

Q: What's your timetable?

A: Phase one is to set up the Hong Kong office, which we've just completed. Phase two is to improve the performance of our funds. In the latest Watson Wyatt survey, 75% of our portfolios beat the combined average of our competitors. My target is to turn that into 100% in the second quartile. That's the toughest part of the job. Phase three is to have a re-evaluation of our fund line-up and to step up our marketing effort to get more assets under management. We've hired a regional marketing manager for mutual funds specifically, and he's developing a strategy right now.

Q: You're considering a new fund line-up in Hong Kong?

A: It'll be a global funds line-up within Manulife Funds Direct. For example, it doesn't really make sense for us to have an index fund now that we've got a Tracker Fund in Hong Kong. So we'll probably be changing that into an active Hong Kong equity fund. Also, we'll see whether there's a need for a European emerging market fund as our client base is in Hong Kong.

Q: Is this office a model that Manulife will develop in other Asian countries?

A: No, that's not the intention at the moment.

Q: One of the hottest topics among investment professional is how many master trusts the MPF market can sustain. How much money do you need to make your portfolio effective?

A: To tell you the truth I don't know how much other people need. But I don't need that much money. I think it all depends on the portfolio and how diversified you want it to be. To start with, say, HK$100 million would be no problem for me. The problem, though, comes in on the administrative side and the costs of setting up portfolios. And that cost will have an impact on the performance of the portfolio.

Q: Other than regulations and disparate markets, are there other major difficulties in investing in Asia?

A: I think it's those two plus other factors. Regulations are a bit of a problem. Wealth management products not only include mutual funds and pooled funds, but also segregated funds, which are the insurance equivalent of mutual funds, such as variable annuities. Many countries' regulations still haven't caught up with that to allow insurance companies to sell variable annuities. Taiwan is an example. Also, it's quite costly to set up an investment trusts there.

The second thing is investors here are more short-term driven. They have to start to look at a longer time frame. Then they'll see the benefits of going to professional managers. Managers here have done a lot better than their North American counterparts. In North America, a very small percentage of active portfolio managers could outperform indices, so it's hard to see why investors would pay 2% management fees to managers when they can pay one-tenth of 1% for an index fund. But investors should bear in mind that it's different in Asia. The Asian markets are less transparent. So you need professionals who have quick access to information to outperform indices.

The biggest single factor, though, that makes investing in Asia difficult is liquidity. Right now there is limited amount of liquidity. So as a fund grows it becomes tougher and tougher to get good performance. It becomes very much a buy-and-hold portfolio instead of an actively traded portfolio.

Q: Where in Asia has the biggest liquidity problem?

A: Indonesia, the Philippines have pretty low liquidity. Even in Hong Kong there's a limited number of corporate issuers in the market. And because we're going to have a lot of people wanting to invest in bond funds in Hong Kong we're going to have to find more innovative products to invest. Whether that's going to other foreign names that are issuing in Hong Kong dollars or some other ways we'll have to look at.

As well as that, if something like another Asian crisis happens, or just concerns over an individual company, because there's this lack of products, some people in the investment community, dealers, for example, would be less willing to take on large positions. So you should do a lot of credit work before you get into a position. It's because you may get to hold on to it for a long time. That's why Manulife focus very much on finding people who have specifically Asian credit experience.

Q: Vietnam is also under your supervision. With only two stocks on their new exchange, it must be a challenge to find ways to invest.

A: We just started an operation there late last year and we're doing extremely well in terms of sales. What happens when you start up a new insurance area you've got to grow a block of business to accumulate some money to invest. I expect sometime next year we'll have to start investing. Right now all you can do is to invest in very short-term investments, like treasury bills.

Q: China will allow foreign managers to form joint ventures with local firms, but only as minority stakeholders. Will that limit how much a manager can do, given there's a gap between investment philosophies?

A: Yes that'll be limiting. But I think part of the reason people would enter a joint venture with us is our investment experience. If we decide to go that route, we'll have to be involved in a partnership in more than just giving money. There are examples where minority stakeholders still have a great deal of influence within the joint venture. It all comes down to the memorandum of understanding and the terms of agreement in the joint-venture partnership.

Q: What's the manager psychology on the Philippines?

A: Transparency is the biggest issue for us, we want to make sure that what we see on financial statement is correct and regulatory authorities are exercising due diligence over the activities of market participants.

But with the Philippines, it's not just a question of us being convinced that things are OK. It's how the rest of the investment community thinks. If we buy but everyone else decides they don't like the government or whatever, then they're going to sell and we're going to underperform. So we have to make the initial assessment ourselves and then make an assessment on what the market thinks. It's a two-fold exercise.

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