Hard for funds to keep pace with EM wealth growth – Fund Forum
The entrepreneurial spirit and economic boom in emerging countries like China has brought great individual wealth without question, but it has also brought an expectation by many locals that performance from fund investments should keep pace with growth in their businesses – daunting for fund providers where in some cases the enterprise in question has expanded at 20% a year.
This was one of the cautionary tales told by fund buyers and managers active in the region, at the Fund Forum conference in Monaco yesterday.
One manager said “you cannot show the average investor 5% to 7% [fund] returns per annum and that is good enough, you need more enticing returns, perhaps from private equity, and double-digit returns are where most of the variations start for most EM investors.”
But panellists agreed the next EM crisis would temper heated expectations considerably. One said the return expectations from investment funds may have subsided somewhat already.
“For every investor that says ‘show me 15% to 20% per annum, there are others who understand the risks they are taking and they are happy to invest in developed world, conservatively-run funds.”
Other panellists said it was folly “just to take beta exposure” in EM fund products distributed to EM consumers. “You have to take some protection to a structured portfolio, for example gold or some bonds, something that is a cost to the portfolio, not an opportunity, but for which you know when you need protection you will get it. But EM clients are so used to having business models growing double digits, many do not understand that their investments cannot always grow that fast, too. If you talk to Chinese entrepreneurs they say, ‘my business is growing at 20% I want to get at least 20% from my investments, too’.”
Luca De Biasi, senior vice president and head of multimanagement and fund selection at BSI SA, said: “Some Asians want to assume that their investments will have the same returns as their business. From a logical point of view it is understandable but it is very risky.”
Matthew Weisser, head of fund and portfolio solutions distribution EMEA at Standard Chartered, added some Asian investors could trade funds not unlike securities – the average holding period for mutual funds in Taiwan, for example, is measured in weeks, not quarters or years.
Magnus Bjorkman, SEB’s head of external managers, said while EM fund buyers may need some hand-holding, so too would developed world clients need gentle introduction to the importance and benefits of EM exposure in their portfolios. He described four stages of doing this, drawing on the Swedish client experience, of introducing eastern European market exposure to SEB’s domestic clients’ portfolios.
The first stage is a strong bias towards fixed income in the relevant market, and to spend time building an asset model. Phase two was explaining one benefit of getting more exposure to retail or institutional clients – “it may be higher risk, but it becomes pretty compelling to broaden the remit”. Phase three, once the EM universe is already familiar to clients, is to be a “path finder and educator in identifying one opportunity [of EM exposure] to clients, whether increased returns or diversification. This stage can be ‘reduced’ to story-telling but it must be based on financial merits.” After a tactical allocation to the market, which can take time in itself, comes strategic allocations over longer periods. Then phase four is advising on alpha allocations to the markets in question, “shifting the value proposition” of investing abroad.
Another panellist noted counselling a developed world client to invest in EMs was sometimes “advising them to do things that are against his natural inclication.