Asia instos leading in smart beta: MSCI

The head of global indexing firm MSCI believes some Asian institutional investors have surpassed Western peers in terms of sophistication regarding smart beta strategies.

Speaking to AsianInvestor at his office in New York, MSCI's chairman and chief executive Henry Fernandez cited the example of the smart beta strategies being developed by Taiwan's Bureau of Labor Funds, Japan's Government Pension Investment Fund and China Investment Corporation.

"It used to be a big gap [versus US and European institutions]," he said, "But now you are seeing Asian asset owners becoming more sophisticated about the new advances in investing, in some ways more so than investors in Europe or the US."

He also highlighted Hong Kong's Monetary Authority, which he said "is really beginning to look at their portfolios on a very holistic basis". He said many Asian institutions are leapfrogging Western institutions.

"Like everyone,” Fernandez said, “they live in a constrained world in terms of resources. The pension funds in particular don’t have the internal resources, but the Chinese and the Koreans have sought the best and the brightest and formed partnerships to learn about global investing. They have been very prudent with their investments. You haven’t seen much in the way of problems in these places."

Fernandez said the forces shaping investment policy in this ‘lower for longer’ era go beyond simple financial metrics. But he suggested “a lot of what’s happening in the investment world is governed by a need to know what you are achieving and what it is costing”.

Passive management is not a trend in isolation, but has come about because of a need for greater transparency, he said. That holds true for smart beta, which goes by other terms such as factor investing.

Factor investing, which uses indices weighted to capture a specific risk premium or ‘factor’, such as low volatility, value or momentum, has been gaining popularity among institutional investors in Asia. Hong Kong’s $7.2 billion Hospital Authority Provident Fund Scheme implemented its first such mandates in July, as reported. The New Zealand Superannuation Fund is also moving to include smart beta in its portfolio mix, while Taiwan’s Bureau of Labor Funds is increasing its allocation to such strategies.

Wealth managers are also moving more towards passive strategies. Urs Brutsch, managing partner of Singapore-based HP Wealth Management, told AsianInvestor his firm’s move towards factor strategies – what he also referred to as “passive-plus” products – was driven by their lower cost and the fact that very few active managers beat their benchmark.

For its part, Fernandez says there are still gaps in MSCI’s products and services that it is looking to fill, despite its acquistions of Barra, a factor-based analytics company, and RiskMetrics, another risk-management platform for bonds. Part of this involves better streamlining the existing systems and their data, but MSCI will build additional tools.

For example, he says the company doesn’t provide enough tools for fixed-income managers. He says the firm is also planning to becoming much more active in the real-estate sector in Asia.