Asset owners sack managers for wrong reasons

Asset managers are being hired for the right reasons and fired for the wrong reasons by Asia’s relatively nascent band of institutional investors, a conference in Hong Kong heard yesterday.

Asked their selection criteria for external asset managers, institutions ranked consistent long-term performance top, above manager reputation, long-term track record in similar asset classes and risk control, according to research from data provider Cerulli Associates.

Client service, managers’ financial strength and level of management fees were down the list.

However, when asked reasons for de-selecting managers, unsatisfactory (short-term) investment performance was listed as having the biggest impact, followed by failure to control risk and excessive staff turnover. Again, level of fees was viewed as having the least impact.

It was an apparent contradiction that did not escape the notice of the audience at the presentation by Cerulli’s Ken Yap entitled Emerging Opportunities to Serve Asian Institutions.

Yap confirmed institutions seem to want managers to deliver consistent performance quarter on quarter as well as on a long-term basis. “We know this is very difficult in the current environment,” he assured.

“On the one hand they ask for long-term performance consistently, but at the same time they are changing managers based on short-term results.”

When one member of the audience questioned whether managers were therefore being hired for the right reasons and fired for the wrong reasons, Yap replied: “You could say that in some cases, unfortunately.”

But there was some room for optimism. Cerulli projects that the level of outsourcing by Asian institutions will rise by double digits in the years ahead, outstripping its forecast for growth in overall assets at around 9.5% annually for the segment.

In a snapshot of the types of mandates assets managers expect to see from institutions over the next 12-18 months, global emerging market debt came out comfortably top. That was followed by global emerging market equity and Asia ex-Japan debt, while hedge funds lagged (see chart).

Interestingly, Cerulli research finds central banks/quasi-government organisations are the most profitable source of institutional business for asset managers this year to date, with a big leap from 2011.

They were followed by pension funds and sovereign wealth funds, which have sunk into third place from top spot last year. Insurance companies also saw a big jump, but remained in fourth.

When questioned by the audience over central banks being most profitable given they generally pay the lowest fees, Yap reflected that the size of assets from this source was much larger while the amount of resources managers commit to this type of client was likely relatively lower.

It was also noted that the institutional universe in North Asia (plus India) is more than four times the size ($7.4 trillion) of that in Southeast Asia ($1.7 trillion). The relationship is partly skewed on account of China representing 66% of Asian central bank assets of almost $4.8 trillion.

Hong Kong institutions are by far the most open to external managers, in that they outsource 35% of their Asia ex-Japan assets, compared with 15.4% for Korea, 10.4% for Singapore, 9.8% for SE Asia (ex Singapore), 9.7% for China, 7.1% for Taiwan and 2.9% for India.

Overall Cerulli forecasts a gradual rise in addressable assets for external managers across the board over the next five years, while acknowledging a trend among large Korean institutions to build internal capabilities. However, the one exception to this rule is Singapore.

It expects addressable as a percentage of investable assets in the city-state to slide slightly to 10.1% by 2016. This reflects both the level of maturity of sovereign funds there and also the impediments that fund managers face in terms of its CPF pension fund system.

In terms of investable pension assets, North Asia (plus India) amounted to $778 billion as at the end of last year, compared with $475 billion for Southeast Asia.

Korea was by far the biggest by country at $362.2 billion, with China a distant second ($192.6 billion). Still, Chinese investable assets are growing faster, at 108% over the past five years, compared with 75% for Korea. In Southeast Asia Malaysia leads the way in terms of investable pension assets at $180 billion, followed by Singapore ($158 billion) and Thailand ($71.5 billion).

While state pension funds remain conservatively invested, they are gradually moving up the risk ladder. As at the end of last year cash and money market instruments accounted for 63.2% of Asia ex-Japan assets, compared with 27.1% in fixed income and 5% in both equities and other (alts, private equity, property, asset-backed securities and corporate restructuring).

That compares favourably with 2007, when they had 68.4% in cash/money market, 20.5% in fixed income, 8.6% in equities and 3% in other.

Moreover, while state pensions outsourced 15.5% of assets in 2007, by the end of last year that figure had risen to 18.9%.

Yap agrees the majority of external mandates will be in fixed income in the foreseeable future, with double digit growth in the segment over the next few years (admittedly with a home bias).

He was speaking at the second annual Fund Manager Selection Asia conference in Hong Kong yesterday.