The tragedy of Thai asset allocation

I was dismayed by a series of slides presented to AsianInvestor’s recent Hong Kong asset owner event. Our annual jamboree, AI Week, is usually an upbeat celebration of the industry’s progress, with our Asian Investment Summit the flagship conference for asset owners, fund managers and service providers.

But the case of Thailand shows that for this industry, two steps forward is followed by one step back.

Pisit Leeahtam, president of the Provident Fund Association of Thailand, presented data showing how asset allocation has changed over the past decade among major Thai institutions. His slides came during a panel discussion, led by AsianInvestor’s Richard Newell, on portfolio construction – a talk that inevitably included risk management, total performance, goals, capabilities and how funds are directed.

In the case of Thailand, the data seems clear: drift, a lack of good governance, and a basic failure by government to pay attention has doomed a generation of savers. We can only hope the information sharing and lessons from events such as ours, along with research from consultants and fund managers, can give experts such as Pisit the ammunition required to effect some real changes.

So what did the data show?

We saw the asset allocation compared between 2004 and 2014 for the Government Pension Fund, the Social Security Office and for other aggregated provident funds.

The assets under management are substantial for Thailand: from 2004’s combined Bt775 billion (about $23 billion at today’s exchange rate), today the three account for Bt2.7 trillion ($80 billion), with the Social Security Office alone managing Bt1.2 trillion.

The huge asset inflows into the two state-run giants, SSO for all employees and GPF for civil servants, have been squandered by poor asset allocation.

In both cases, almost all inflows over the past decade have gone to domestic government bonds. For SSO, in absolute terms this means holdings of government securities has risen from Bt91 billion in 2004 to Bt835 billion in 2014. Although all other assets also saw net growth, except for bank deposits, these are very modest in comparison.

For GPF, the story is even weirder. Thai fixed income (which in this case may include corporate bonds) rose from Bt135 billion to Bt452 billion – not as dramatic an increase. But other than domestic equity, which enjoyed a very small increase, and some moves into global asset classes, allocations elsewhere declined in absolute terms, including domestic real estate and mutual funds.

That’s the trend for absolute holdings. Let’s look at the charts for asset allocation as percentages. Take SSO first.

Source: www.sso.go.th

SSO in 2004 had 34% of its total assets positioned in government bonds and treasury bills. Bank deposits made another 25% and state enterprise bonds another 23%. Equities, property and international exposures accounted for less than 4%.

As of 2014, the SSO has more asset classes, with equities up to 9% and property and foreign allocations another 4%. But everything else has shrunk as a portion of the total allocation because government bonds now account for 67% of SSO’s portfolio. Sixty-seven percent!

OK, let’s look now at GPF. This institution made a lot of progress in the early-to-mid 2000s in terms of sophistication and international diversification. It was then led by secretary-general Visit Tantisunthorn, who was the principle driver of this welcome trend.

Source: www.gpf.or.th

In 2004, Thai fixed income accounted for 55% of GPF’s asset allocation and deposits another 24%. Direct equity, mutual funds and real estate rounded out the rest. By 2006-07, GPF had moved into many new asset classes. It was Thailand’s pioneer, adding global equity, fixed income, property, and real assets.

But by 2014 those initiatives had been either pared back or stalled, because we can see the allocation to Thai fixed income had grown to 65%.

Pisit explained these shifts reflect moves in 2009 to introduce member choice, and most members – lacking financial literacy – opted for the safest allocation. But people who have worked with GPF and SSO told me that member allocations are actually very modest: these portfolios reflect the institutions’ own asset allocation decisions.

Their boards and their supervisors (the Ministry of Labour and Social Welfare for SSO, the Ministry of Finance for GPF) lacked the understanding or nerve to handle the global financial crisis of 2008. They reacted by shifting to domestic bonds as quickly as possible. This is understandable. But then not only did they miss the subsequent rallies in financial markets, but they never attempted to put asset allocation back on track.

The reason is probably political. These institutions, like all aspects of officialdom, got caught up in the constant struggle between Red Shirts and Yellow Shirts. In June 2009, the GPF’s Visit was fired over allegations of front-running trades – and while front-running is surely endemic in Bangkok, it is possible that this was an excuse dug up to punish GPF for dreadful performance during the crisis, or perhaps even to influence it vis-à-vis Reds and Yellows.

Whatever the case, subsequent managers have had no appetite – and been given no reason to acquire one – for taking any sort of risk. So there has been no move to reconsider having two-thirds of these funds in domestic bonds.

Today the 10-year Thai government bond yields 2.75%. Inflation over the past decade has averaged 3.5% to 4% (with extreme volatility). It doesn’t take a rocket scientist to see the incredible value destruction that these two funds have engaged in over the past 10 years. The lack of empowerment, of proper governing principles or institutions, and of indifference in the midst of a domestic political struggle marked by strikes and coups, is responsible for a generation of savers at best treading water, probably losing value, and certainly missing out on the huge opportunities in global markets to beat domestic inflation.

Source: www.thaipvd.com

One more point. Member choice at GPF and SSO is cumbersome, so it is rarely used; most assets are in the default portfolio. But choice is better constructed and more actively used in private provident funds. The aggregate absolute allocations have been as much to corporate bonds and equities as to government bonds over the past 10 years.

Indeed, as the last set of pie charts show, the total allocation among provident funds to government bonds has fallen from 66% in 2004 to only 22% in 2014, while substantial flows have gone to domestic equities and corporate bonds.

It is remarkable that when ordinary people (or at least employers) really are given the chance to make decisions, they opt for sensible diversification. The slides did not show total performance but it is obvious that the provident funds will have provided a much better average return over the past decade. The government-run funds, in contrast, after a burst of progress in the 2000s, have buried their heads in the sand.