Winning investment mandates from institutional investors is difficult even when they are looking to increase their allocation to Asia. Firms need to change their focus from marketing to research.There are some subtleties in life which can only be learned through experience. The definition of “asset management in Asia” is one of them. It is only after being in hedge fund industry for a while that I realised that the same can be (and is) interpreted in the following ways:-
- Non-Asian investors investing in Asian asset classes.
- Asian investors investing in Asian asset classes.
- Asian investors investing in asset classes globally.
In this article I will focus on the first two interpretations i.e. investors who are interested in increasing allocation to Asian assets. The investors in the third definition are of a different kind altogether and I am saving that topic for another day.
It may surprise some of the readers to know that despite the rhetoric about the next wave of growth coming from Asia, Asian assets by and large represent a minority portion of the portfolio for institutional investors which include Sovereign Wealth Funds (both Asian and non-Asian), university endowments, insurance companies, pension funds and high-net worth individuals.
So, why does this anomaly persist in a world where there are not many investment opportunities outside Asia? Well, the problem lies on the supply side. Here’s why:
GLOBAL ASSET MANAGEMENT FIRMS ARE HORRIBLY WRONG ABOUT THEIR ASIA STRATEGY
It doesn’t cease to amaze me that global asset management firms which open shops in Asia look at Asian investors rather than Asian asset classes. They use Asia as a marketing outpost to increase their investor base rather than create Asian products or develop Asia-focused research capabilities.
It is marketing first and then research for non-Asian asset management firms that set afoot in Asia. This trend is not limited to the asset management arms of global financial behemoths but even alternative investments like Private Equity funds and Fund-of-Hedge funds have been guilty of this mistake. A typical setup of these firms in Asia consists of a Business Development/Marketing officer supported by locally hired sales people and one or two junior analysts.
The sales people, which consist of relationship managers and distributors, are mandated to push the firm’s global investment products while the analysts do nothing but read third party research reports all day and ‘brief’ the sales guys on them for their pitch. Primary research and in-house developed Asia-focused products are alien terms at these firms. Often an old hand at these firms is relocated to Asia to give more it credibility but that doesn’t change the underlying problem.
What they don’t realise is that it is not the ‘salesy’ personality that is going to win investment mandates but rather the ‘unglamorous’ but informed research personnel and Asia-focused products which are better equipped to do the job for them. Unlike the good days gone by, in these turbulent times investors are more concerned with preserving and growing their capital rather than their Relationship Manager’s skills at golf. It is no wonder then that over a dozen of global asset management firms have been unable to win any sizeable investment mandates in Asia over the last few years. Some of them eventually shut shop in Asia.
By focussing on research not only these firms increase their chances of attracting Asian investors but would also be able to serve their non-Asian investors better by offering them in-house Asia-focused products.
THE DIFFERENCES BETWEEN ASIAN AND NON-ASIAN INVESTORS
From my personal experience, there are two main differences between non-Asian and Asian institutional investors looking to invest in Asian assets. While the former are relatively less informed and more curious, the latter are generally are completely abreast with the market developments and are extremely keen to understand the ‘investment strategy’.
It requires different approaches to educate and pitch to these varying types of investors. For example, if one is a fixed income fund manager in Asia, plain vanilla credit analysis capabilities are not good enough to close non-Asian institutional investors. They wish to be made aware of the macro trends and as well as the future expectations in this part of the world. At the same time Asian investors (who naturally are more aware of the macro themes) would be more interested in country or industry specific forecasts like Indonesian coal sector, China construction sector etc. For a firm to be able to cater effectively to both these kinds of investors, ability to attract and retain key talent is paramount. Unfortunately talent that excels at both research and sales is a rare commodity in Asia and thus is in high-demand. These are like the queen on the chessboard who can move both diagonally and laterally. No wonder that they are as powerful as the queen in chess as well and thus command top dollar for their services.
In conclusion, billions of dollars entered Asia during Quantitative Easing as investors were desperate for healthier returns. However billions more didn’t make it beyond they cheque books as institutional investors weren’t happy with research capabilities of the asset management firms. In a world where the competition for assets is getting fierce, it is the quality of research that is going to be the key differentiator in Asia.
Tanuj Khosla is currently working as a Research Analyst at 3 Degrees Asset Management, a fund management firm in Singapore. He can be followed on Twitter @Tanuj_Khosla. Alternatively he can be reached at [email protected] Views expressed are personal.
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