Crisis will affect Asian funds' resources
Saturday, 20 December 2008
Mark Konyn
A few years ago I met a rival chief executive of a major financial services company who was bemoaning the dearth of talent available in the Asian fund management industry. He correctly identified the genesis of the problem being the Asian financial crisis that had deprived the industry of fresh talent over multiple years as fund management companies tried to reduce spending.
As history repeats, the current financial crisis and concurrent sell off in Asian stock markets is likely to test the resolve of international fund management companies that had asserted their commitment to building a strong Asian presence in previous bull market years. Asian regional markets have lost over 50 per cent this year as measured by the MSCI Asia ex-Japan index in US dollar terms, which transmits directly to a shortfall in fund managers' revenue.
For managers rewarded by performance fees the situation is likely to be compounded by the imposition of a "high water mark" that requires managers to make good any performance shortfall relative to targets before the performance fee can resume. Although performance fees are most common with so-called alternative asset managers, where pay for performance is the mantra, many traditional fund managers have been shifting more to performance fees over the past several years in order to align revenue with fund manager variable compensation.
The Asian fund management industry has faced many bouts of extreme volatility in the past and indeed survived a dress rehearsal of the current global banking and credit crisis in the late 1990s. For clients back in that period the pain was overcome as the region was able to survive the difficulties facing the financial system and benefit from a sharp rebound in share prices subsequently.
However, hopes of a repeat performance and a relatively quick turnround in stock market sentiment seem remote at this juncture.
Japan's economy remains weak, the US is suffering from the fallout of the housing market slump and the fall in consumer confidence, Europe is faring no better, and Asia too is slowing. Unlike the situation in the late 1990s when the global economy was roaring ahead, buoyed by technology companies and investor exuberance, Asian markets are unlikely to recover quickly during the current circumstances of a synchronised slowdown.
International investors have also questioned their commitment to investing in Asia as a result of the current rout. Feedback from investors is that, despite an underlying belief that the longer term structural growth story for Asia and especially China is intact, allocations to the region have been reduced.
Some institutions have repatriated money from Asian stock markets as part of an asset allocation decision to raise cash and improve the financial position in their base exposure and realise gains achieved in the bull market. Regardless of the motivation, the result is fewer assets to be managed by Asian fund managers. Whereas in the previous cycle this would have been devastating for the industry, the current crisis is more a setback as the sector is now more mature and diversified.
The impact on the industry could prove significant in respect of longer term resourcing. Back in the Asian crisis fund managers stopped recruiting and developing talent. The result was a discontinuity in human resources that hampered the industry's growth as business improved. Given the attrition in the industry's asset base resulting from the current crisis, we are likely to see something similar this time around.
The professionals who remain are likely to be stronger through the experience. A new generation of managers has gained valuable lessons from the crisis and many are cutting their teeth in a new environment where investing in China and understanding the influence of this burgeoning economy on the rest of the Asian region is increasingly important. The skill gap between those that have experience and those that do not is likely to widen over the next several years.
Investors too have learned important lessons. The mad rush last year in China for funds that invested overseas has turned to disappointment. The next steps are likely to be smaller and taken more carefully. Similarly investors across Asia seduced by the prospect of investing in Asia's frontier markets have suffered, as these markets have been more heavily affected by the collapse in investor confidence.
Market share among fund management companies could well change hands during this stock market pull back. With many investment companies operating in the region as subsidiaries of major international groups, there may be a tendency to reduce investments in emerging opportunities at times of difficulty in home markets.
This will leave the door ajar for those that have a longer term view and faith in the structural growth trend in Asia.
A few years ago I met a rival chief executive of a major financial services company who was bemoaning the dearth of talent available in the Asian fund management industry. He correctly identified the genesis of the problem being the Asian financial crisis that had deprived the industry of fresh talent over multiple years as fund management companies tried to reduce spending.
As history repeats, the current financial crisis and concurrent sell off in Asian stock markets is likely to test the resolve of international fund management companies that had asserted their commitment to building a strong Asian presence in previous bull market years. Asian regional markets have lost over 50 per cent this year as measured by the MSCI Asia ex-Japan index in US dollar terms, which transmits directly to a shortfall in fund managers' revenue.
For managers rewarded by performance fees the situation is likely to be compounded by the imposition of a "high water mark" that requires managers to make good any performance shortfall relative to targets before the performance fee can resume. Although performance fees are most common with so-called alternative asset managers, where pay for performance is the mantra, many traditional fund managers have been shifting more to performance fees over the past several years in order to align revenue with fund manager variable compensation.
The Asian fund management industry has faced many bouts of extreme volatility in the past and indeed survived a dress rehearsal of the current global banking and credit crisis in the late 1990s. For clients back in that period the pain was overcome as the region was able to survive the difficulties facing the financial system and benefit from a sharp rebound in share prices subsequently.
However, hopes of a repeat performance and a relatively quick turnround in stock market sentiment seem remote at this juncture.
Japan's economy remains weak, the US is suffering from the fallout of the housing market slump and the fall in consumer confidence, Europe is faring no better, and Asia too is slowing. Unlike the situation in the late 1990s when the global economy was roaring ahead, buoyed by technology companies and investor exuberance, Asian markets are unlikely to recover quickly during the current circumstances of a synchronised slowdown.
International investors have also questioned their commitment to investing in Asia as a result of the current rout. Feedback from investors is that, despite an underlying belief that the longer term structural growth story for Asia and especially China is intact, allocations to the region have been reduced.
Some institutions have repatriated money from Asian stock markets as part of an asset allocation decision to raise cash and improve the financial position in their base exposure and realise gains achieved in the bull market. Regardless of the motivation, the result is fewer assets to be managed by Asian fund managers. Whereas in the previous cycle this would have been devastating for the industry, the current crisis is more a setback as the sector is now more mature and diversified.
The impact on the industry could prove significant in respect of longer term resourcing. Back in the Asian crisis fund managers stopped recruiting and developing talent. The result was a discontinuity in human resources that hampered the industry's growth as business improved. Given the attrition in the industry's asset base resulting from the current crisis, we are likely to see something similar this time around.
The professionals who remain are likely to be stronger through the experience. A new generation of managers has gained valuable lessons from the crisis and many are cutting their teeth in a new environment where investing in China and understanding the influence of this burgeoning economy on the rest of the Asian region is increasingly important. The skill gap between those that have experience and those that do not is likely to widen over the next several years.
Investors too have learned important lessons. The mad rush last year in China for funds that invested overseas has turned to disappointment. The next steps are likely to be smaller and taken more carefully. Similarly investors across Asia seduced by the prospect of investing in Asia's frontier markets have suffered, as these markets have been more heavily affected by the collapse in investor confidence.
Market share among fund management companies could well change hands during this stock market pull back. With many investment companies operating in the region as subsidiaries of major international groups, there may be a tendency to reduce investments in emerging opportunities at times of difficulty in home markets.
This will leave the door ajar for those that have a longer term view and faith in the structural growth trend in Asia.