When the first four funds under China’s qualified domestic institutional investor program, which allows the Chinese to invest in overseas markets, were launched late last year, they were swamped with applications. The Asia-Pacific Advantage Fund offered by China International Fund Management Co. attracted subscriptions worth 116.3 billion yuan ($15.5 billion), nearly four times the fund’s government-set quota of 30 billion yuan. The fund not only had to close right after it opened, in October, but it also returned 86.3 billion yuan to investors, according to Ken Tam, chief executive officer at JF Asset Management, the Asian division of JPMorgan Asset Management that runs China International in a joint venture with Shanghai International Trust and Investment Co.
Today such rampant investor demand seems like a distant memory. None of the three QDII funds launched since the start of this year has attracted more than 507 million yuan. “The situation has changed quite substantially,” says Tam. “Investor confidence is low.”
For Asian fund managers the game is all about adjusting to that dramatic mood change. Instead of struggling to cope with massive inflows, as they did in 2007, managers are scrambling to find ways to stabilize assets at a time when the fallout from the U.S.-led credit crisis and rising inflation have pummeled markets across the region and prompted many investors to flee. “Asian markets are very momentum-driven,” explains Christof Kutscher, Hong Kong–based head of UBS Global Asset Management for the Asia-Pacific region. “People are scared about volatility and are sitting on the sidelines.”
Like many firms, the giant Swiss bank enjoyed a phenomenal rise in its Asian assets under management, with growth of 33.0 percent in 2007, to $141.9 billion. Total assets of the Asia 100, Institutional Investor’s annual ranking of the region’s biggest money managers, surged 18.3 percent last year — nearly double the 10.6 percent growth reported in 2006 — to $11 trillion. But the party appears to be over, at least for now. “That was a nice run for a few years,” Kutscher says. “We tripled our revenue, but now we’ve come back to reality.”
The higher the markets rose in 2007, the harder they have fallen in 2008: According to MSCI, China soared 63.1 percent last year, in dollar terms, and has plunged 33.6 percent this year through August 15; India, up 71.2 percent last year and down 36.7 percent this year; Hong Kong, up 37.5 percent and now down 27.7 percent; and South Korea, which gained 30.0 percent last year and has lost 24.5 percent this year. Only Japan, whose close economic ties to the U.S. made it feel the effects of the subprime mortgage crisis earlier than other countries, had a different story to tell, losing 5.4 percent in 2007 and a further 15.1 percent in 2008 through mid-August.
The investment management division of Netherlands-based ING Group saw year-over-year Asian asset growth of 30.6 percent in 2007, to $161.7 billion. Mike Ferrer, regional general manager for South Asia, says that at this time last year, before the credit crisis had started to make ripples in Europe, his firm was still enjoying healthy inflows, particularly in equities and higher-margin products. “But as we entered 2008, there were net redemptions in a lot of equity funds,” he says. “Fortunately, we have still managed to keep overall assets under management generally flat, but in more conservative types of funds.”
Interest in other markets is helping to make up for sluggish demand for Asia investments, he says. For example, ING recently raised $40 million from Indian investors for a Latin American fund: “In this environment if you can do a fund of this size, you are doing okay.”
Despite the severity of the market corrections across Asia, many fund managers predict the pain will be short-lived. The long-term growth story remains solid, they say, given the region’s rising population and the growing ranks of the middle class, many of whom are investing for the first time. Plus, the money managers say, a downturn provides a valuable education for new investors. “This is good for the long-term development of the market,” says JFAM’s Tam. “It shows that whether it’s an international or a domestic product, it carries risk. People need to pay more attention to that and align investments with their own risk profile.”
Kerr Neilson, the Sydney-based head of Platinum Asset Management, which invests predominantly in Asian markets and enjoyed asset growth of 4.3 percent last year, to $17.7 billion, suspects that many Asian investors have been treating the stock market like a temporary home for their money rather than a place to invest. “These are momentum markets, but we are not momentum investors,” he says. “We look to long-term trends and buy on concept. That has been the most profitable method — at least until June.” Like Tam, Neilson sees some value in the correction. “We are not miserable. Perhaps the slowing is good — we can actually have a reasonable environment for ourselves as investors.”
Although demand fell sharply for some products, the recent market ructions have sparked new interest in others, such as alternative assets. UBS’s Kutscher says Asian investors have a growing appetite for hedge fund products, infrastructure funds and private equity. Brazilian funds have also attracted the interest of Asian investors, in large part owing to awareness of the region’s seemingly insatiable demand for Brazil’s natural resources, such as iron ore and soybeans. “If you understand the client needs, you can do very good business in these market conditions,” Kutscher says.
Michael Clarke, director of international and business strategy at Sydney-based AMP Capital Investors, has observed a move away from country-based equity and fixed-income offerings and toward regional products and alternative investments such as infrastructure and hedge funds. Last month, AMP, whose assets increased 11.2 percent last year, to $68.5 billion, launched its $750 million Asian Giants Infrastructure Fund, which will target China and India but also look at Hong Kong, Malaysia, Singapore, South Korea and Taiwan. “We want to become an Asia regional powerhouse, but it will be a step-by-step process,” Clarke says.
Although China is still the major focus of the region’s growth, other Asian markets also look promising. UBS took a 51 percent stake in a joint venture with Hana Financial Group in South Korea in July 2007, adding 108 staff positions to its Asian operations. Earlier this year it entered into a joint venture agreement with Gemdale Corp. in China that will invest in residential property.
Competition is intensifying in India, where ING’s Ferrer says 30 asset managers are battling for market share. But he likes the Southeast Asian markets of Malaysia, the Philippines and Thailand. “These are the markets that have great potential in the next five to ten years,” he says. ING opened an office in Malaysia three years ago that had attracted $500 million as of year-end 2007, and he expects that figure to double by the end of next year.
Both Ferrer and Clarke agree that sovereign wealth funds, particularly those from the Middle East, are having a bigger influence in Asia. In June, ING opened an office in Dubai, becoming the first international financial institution to establish an asset management business in the Gulf emirate. “They are well armed with money, and they add to the broader inflows into Asia,” says Clarke.
