But if people came to be imbued with great optimism for the future, at every turn they were doused with a sobering splash of realism.
Yes, there were lucrative opportunities for institutional asset managers with their sights trained on the emerging or reforming retirement savings markets of Korea and Taiwan or the established pension fund systems of Australia, Hong Kong and Japan. But they were warned that they could not simply “waltz in and get a mandate and a fat fee”.
For, as in the mature pension fund markets of Europe and the US, consultants acted as gatekeepers who assembled beauty parades and carefully scrutinised the business strategy and product offerings of each short-listed candidate.
Not only did it help to have good relationships with consultants back home, would-be entrants were also told they would have to invest in putting fund managers or analysts on the ground in their target markets because consultants there did not speak to sales staff.
Asset managers contemplating their route to market were warned that joint ventures with local banks or securities houses were fraught with risks and challenges – building trust, breaking down cultural barriers, establishing common goals and creating a clear understanding of each party’s roles and responsibilities.
The risks of getting it wrong were highlighted in a recent report by management consultants, McKinsey which revealed that two-thirds of Sino-foreign asset managers in China today have yet to break even.
Once on the ground, finding and retaining quality people was a challenge affecting every fund manager operating across Asia. For instance, it was difficult to find investment managers with two to three years’ experience and some of the better asset managers were being snapped up by hedge funds who offered a more attractive remuneration package than traditional investment houses.
On the wholesale/retail side, it was emphasised again and again that investor education remained a thorny and stubborn issue that seems to be defying the efforts of long-established players such as HSBC, Fidelity and Schroders to address successfully.
For instance, HSBC Jintrust has produced a booklet for retail investors in mainland China entitled “The Ten Golden Rules”. Despite distributing nearly a million copies to clients and participants at education seminars, Blair Pickerell, recently-departed head of HSBC Investments for Asia lamented the fact that the initiative has not succeeded in changing investor behaviour.
If HSBC, with its roots in the local market cannot crack this long-running problem, one wonders what other fund managers operating in the region can hope to achieve.
But as long as the Chinese A-share market continues its spectacular bull run, asset managers will enjoy a bit of breathing space before reality bites. Investment diversification is not a pressing issue when few other assets can match the return on domestic equities. This is borne out by the poor response to date to the Qualified Domestic Institutional Investor (QDII) scheme, which allows Chinese-based institutions to invest in overseas assets. Only a tiny percentage of the $14.7bn in QDII quota has been used, with the lack of demand being blamed on the restriction of products to low-yielding fixed-income investments.
That will change. Eventually the Chinese securities regulator will permit a broader range of non-domestic assets and eventually the gravity-defying Chinese A-share market will suffer a sustained fall. Fund managers will want to be in a situation where investors, institutional and retail alike, have already attained a degree of knowledge and sophistication that forestalls panic and makes them ready to rapidly embrace other asset classes.
There is little room for complacency. In an interview carried in our April issue, Robert Lawrence Kuhn, a senior advisor with Citi’s Corporate and Investment Banking business and editor-in-chief of a recently-published book on China’s financial markets, said the Chinese government was worried about the possible social consequences of people losing money.
The spectre of commission-hungry distributors dragging beleagured asset managers into a damaging mis-selling scandal might have been enough to spark a head-long rush to Hong Kong airport. But it wasn’t all gloom and doom. Institutional demand for absolute return and hedge fund strategies was said to be on the rise in a number of Asian markets driven by the search for higher performance and the increasing separation of alpha and beta portfolios.
Also, it is believed that in China the securities regulator might allow for segregated account management for institutional investors sometime this year. This development could prompt higher inflows of institutional assets – monies which are likely to stay put for a lot longer than retail funds.
Henry Smith, editor
henry.smith@ft.com
