Thailand's funds broaden their horizons
Saturday, 1 September 2007
William Barnes
The recent sharp rise in the value of the Thai baht is helping reshape a hithertoconservative fund management industry by encouraging investment overseas, according to the secretary-general of the Thai Securities and Exchange Commission (SEC).
The Bank of Thailand has been wary of permitting locally registered funds to invest overseas since the inception of the industry 20 years ago. The 17 per cent rise in the value of the bath since the start of 2006 is changing that.
"At the beginning of the year we proposed lifting the limits on investors going overseas, but the central bank didn't think it was appropriate. Now they are having a rethink and we are seizing the opportunity," says the SEC's Thirachai Phuvanatnaranubala. "This is an opportunity and a threat - you can expand your horizons by looking overseas, but a manager must add value," he says.
In the face of political and economic crises, assets under management in Thailand grew faster than anywhere else in south-east Asia, at an annualised rate of 49 per cent between 2001 and 2006. This compares with an increase of 21.6 per cent in Singapore and 24.9 per cent in Malaysia, and an overall rate of 31 per cent for Southeast Asia.
Gina Heng, an analyst for Boston-based consultants Cerulli Associates, says total volumes remain modest compared with north Asia, but the potential for growth is considerable, driven in part by the sort of reforms that Thailand is now tackling.
Thailand already accounts for 40 per cent of the region's managed funds, compared with Singapore's share of 25 per cent. Singapore accounted for 37 per cent of managed funds as late as 2001. "It's definitely not developed yet, but they're trying," says Ms Heng. "We see Thailand as a key driver of growth in the region."
Most Thais still deposit savings equivalent to 80 per cent of GDP into bank deposits because so many were burnt in the 1997 crash. The $43bn in managed funds (mutual, private and provident) accounts for just 20 per cent of GDP at a time when the number of retirees is growing so quickly they will overtake savers within a decade.
Mr Tirachai says expanding fund management in Thailand is an issue of national importance as it becomes increasingly vital for a shrinking base of savers to support an ageing population with the best returns the local industry can manage: "We absolutely must build up our asset management -- and we haven't much time. Clearly our managers need to sharpen up overseas. That's going to mean understanding foreign economies and big foreign companies and picking good foreign partners."
In addition to a wave of official and private propaganda promoting "smart" saving, the authorities will remove total deposit insurance in approximately four years, which will mean that the risks of bad bank management will be "properly priced in", allowing the best banks to slash their deposit rates. "The only way to get a proper return will be to diversify," says Mr Tirachai.
Every fund can currently invest a total of $50m in foreign assets. Local funds can apply for permission to exceed that limit, but rarely fill up even their initial foreign quota. The suspicion inside the SEC is that many funds feel rather nervous about exploring the wider world and foreign partners. They have found it fairly easy to promote themselves to investors on their tax advantages - especially over bank deposits.
As part of the current relaxation, funds will now be allowed to invest overseas in non-investment grade paper and in any assets similar to a fund's own domestic purchases. "It's all about transparency and keeping the investment risks in the open. Everything is on the front burner now and we are open to suggestions," says Mr Tirachai.
Privately, several Bangkok-based fund managers argue that the industry should be left to organise itself, with a lighter regulatory hand. This is unlikely: besides the currency and capital worries, the revenues that flow tax-free into funds -- with fund dividends taxed at 15 per cent -- make them potential tax reduction vehicles, as well as being a way for foreigners to skirt onerous restrictions on investments in property.
"The tax and property privileges mean we can't treat these things like ordinary investments. Self-regulation will have to be something for the future," says Mr Tirachai.
Nor will Thailand's stock market become a steadier place any time soon. The secretary-general hopes that as more tailored products, such as large cap stocks or sectors, big retirement funds and a new futures market all become increasingly important, investors will have more ways of finessing the market's volatility.
He adds: "This market is going to remain driven by its retail investors for the foreseeable future. I also have to tell you there aren't many great private companies gearing up to list either. What we are going to do is develop what we've got, which frankly is pretty good."
-- FT Syndication Service
The recent sharp rise in the value of the Thai baht is helping reshape a hithertoconservative fund management industry by encouraging investment overseas, according to the secretary-general of the Thai Securities and Exchange Commission (SEC).
The Bank of Thailand has been wary of permitting locally registered funds to invest overseas since the inception of the industry 20 years ago. The 17 per cent rise in the value of the bath since the start of 2006 is changing that.
"At the beginning of the year we proposed lifting the limits on investors going overseas, but the central bank didn't think it was appropriate. Now they are having a rethink and we are seizing the opportunity," says the SEC's Thirachai Phuvanatnaranubala. "This is an opportunity and a threat - you can expand your horizons by looking overseas, but a manager must add value," he says.
In the face of political and economic crises, assets under management in Thailand grew faster than anywhere else in south-east Asia, at an annualised rate of 49 per cent between 2001 and 2006. This compares with an increase of 21.6 per cent in Singapore and 24.9 per cent in Malaysia, and an overall rate of 31 per cent for Southeast Asia.
Gina Heng, an analyst for Boston-based consultants Cerulli Associates, says total volumes remain modest compared with north Asia, but the potential for growth is considerable, driven in part by the sort of reforms that Thailand is now tackling.
Thailand already accounts for 40 per cent of the region's managed funds, compared with Singapore's share of 25 per cent. Singapore accounted for 37 per cent of managed funds as late as 2001. "It's definitely not developed yet, but they're trying," says Ms Heng. "We see Thailand as a key driver of growth in the region."
Most Thais still deposit savings equivalent to 80 per cent of GDP into bank deposits because so many were burnt in the 1997 crash. The $43bn in managed funds (mutual, private and provident) accounts for just 20 per cent of GDP at a time when the number of retirees is growing so quickly they will overtake savers within a decade.
Mr Tirachai says expanding fund management in Thailand is an issue of national importance as it becomes increasingly vital for a shrinking base of savers to support an ageing population with the best returns the local industry can manage: "We absolutely must build up our asset management -- and we haven't much time. Clearly our managers need to sharpen up overseas. That's going to mean understanding foreign economies and big foreign companies and picking good foreign partners."
In addition to a wave of official and private propaganda promoting "smart" saving, the authorities will remove total deposit insurance in approximately four years, which will mean that the risks of bad bank management will be "properly priced in", allowing the best banks to slash their deposit rates. "The only way to get a proper return will be to diversify," says Mr Tirachai.
Every fund can currently invest a total of $50m in foreign assets. Local funds can apply for permission to exceed that limit, but rarely fill up even their initial foreign quota. The suspicion inside the SEC is that many funds feel rather nervous about exploring the wider world and foreign partners. They have found it fairly easy to promote themselves to investors on their tax advantages - especially over bank deposits.
As part of the current relaxation, funds will now be allowed to invest overseas in non-investment grade paper and in any assets similar to a fund's own domestic purchases. "It's all about transparency and keeping the investment risks in the open. Everything is on the front burner now and we are open to suggestions," says Mr Tirachai.
Privately, several Bangkok-based fund managers argue that the industry should be left to organise itself, with a lighter regulatory hand. This is unlikely: besides the currency and capital worries, the revenues that flow tax-free into funds -- with fund dividends taxed at 15 per cent -- make them potential tax reduction vehicles, as well as being a way for foreigners to skirt onerous restrictions on investments in property.
"The tax and property privileges mean we can't treat these things like ordinary investments. Self-regulation will have to be something for the future," says Mr Tirachai.
Nor will Thailand's stock market become a steadier place any time soon. The secretary-general hopes that as more tailored products, such as large cap stocks or sectors, big retirement funds and a new futures market all become increasingly important, investors will have more ways of finessing the market's volatility.
He adds: "This market is going to remain driven by its retail investors for the foreseeable future. I also have to tell you there aren't many great private companies gearing up to list either. What we are going to do is develop what we've got, which frankly is pretty good."
-- FT Syndication Service