Asia 100: Going for Growth

At a time when global economic prospects appear as uncertain as ever, the world’s most-dynamic region has a special allure.

International investors have been pouring money into Asian markets, looking to gain exposure to the area’s fast-growing economies. And the biggest beneficiaries of this trend are large Western asset managers, which have seen their exposure to Asian markets rise sharply.

Assets under management of the Asia 100, Institutional Investor’s annual ranking of the region’s biggest money managers, shot up 16.5 percent in 2009, to $11.3 trillion. The gains more than reversed an 11.8 percent decline in assets in the preceding year.

Leading the way is BlackRock, the New York–based firm that is now the world’s largest fund manager. Its acquisition of Barclays Global Investors, which last year ranked as the largest international fund manager among the Asia 100, increased BlackRock’s Asian assets to $422 billion at the end of 2009, from $68.8 billion a year earlier, and vaults the firm to first place from tenth among international firms. BlackRock’s gains reflect more than just M&A, moreover; its Asian assets were up 25.1 percent from the combined totals of BGI and BlackRock in 2008.

Other international managers have also posted strong increases. State Street Global Advisors, the second-­largest international firm, saw its Asian assets under management rocket 30.9 percent last year, to $342 billion. Assets have continued to grow this year, says Koji ­Yamamoto, the firm’s Tokyo-­based president for Japan. “We saw a large amount of money shift from active to passive in 2009, and we continue to benefit in 2010, as well,” he says. “U.S. and European investors are increasingly investing in the region.”

Fidelity Investments boosted its Asian assets to $161 billion in 2009, from $104 billion a year earlier, and jumps three places in the ranking, to No. 3. It is followed by J.P. Morgan Asset Management, which increased its assets by $17.8 billion, to $134 billion.

International investors are clearly chasing growth. The region’s economies have staged a dramatic recovery from the global slump that followed the September 2008 collapse of Lehman Brothers Holdings, in stark contrast to the continuing sluggishness and fears of a double-dip recession that haunt the U.S. and Europe. Non-­Japan Asia grew by 5.2 percent in 2009 and is forecast to accelerate to 7.9 percent this year, according to the Asian Development Bank. China is more than ever the regional — and global — motor, with growth speeding from 9.1 percent last year to a forecast rate of more than 10 percent in 2010, in the view of the International Monetary Fund.

“Foreign investors have rushed back into emerging Asian markets, attracted by the region’s swift recovery from the global crisis, a return of risk appetite and very low returns on assets in developed economies,” the ADB said in a recent report. The region enjoyed net inflows of portfolio investment into equities of $63.3 billion in 2009, a sharp turnaround from outflows of $54.4 billion a year earlier, according to ADB data.

As strong as the recovery is, though, the recent trend is not a raging bull-­market stampede. Indeed, the area’s stock markets, which rebounded sprightly in 2009, have weakened again this year. The MSCI all-country Asia-­Pacific index slipped 1.8 percent, in dollar terms, year-to-date through late last month, after rising 34.5 percent in 2009; in local currencies the index climbed 29.5 percent last year, but it gave back 5.2 percent in 2010. China’s market has whipsawed even more dramatically. The CSI 300 index nearly doubled in 2009 but has declined by 18.9 percent this year.

The contrast between robust economies and choppy equity markets is a pitfall for many investors, says Cheah Cheng Hye, co-­founder and chairman of Value Partners Group, a $5.7 billion, Hong Kong–based asset manager that focuses on China. “Investors are in their usual state of confusion,” he says. “Amid all the mood swings, an important point has been missed: From one year to the next, the performance of China-­related stocks isn’t well connected with economic growth numbers.” On-the-ground research is vital to investing success in the greater China market, Cheah says. Value Partners’ analysts and fund managers make 2,500 visits to companies in the region each year.

South Korea is typical of the broader Asian rebound. Foreign investors have been the major buyers of stocks in Seoul, acquiring 9.5 trillion won ($8 billion) worth of Korean shares in the year-to-date and raising their total purchases since the start of 2009 to 33 trillion won, according to Mirae Assets Financial Group, fourth-ranked in the country, with $66.9 billion in assets. The market has managed to retain its gains, with the KRX 100 index up 4.2 percent this year, as of late last month, after rising 50.8 percent in 2009. Still, the sheer economic and market volatility poses a challenge for money managers, says Koo Jae-sang, CEO of Mirae Asset Global Investments, the group’s money management arm. The firm tries to overcome volatility by focusing on what Koo considers to be undervalued growth stocks. “In the second half of 2008, when the global crisis hit the market, our company invested in LG Chem [the country’s largest chemical company], Hyundai Mobis [an auto parts maker] and Samsung Techwin [an imaging and robotics company],” he says. “They have outperformed the market by 200 percent so far.”

Asia’s rising economic tide hasn’t lifted the boats of many of the region’s alternative fund managers. “In general, 2010 has been a tough year,” says Paul Smith, chief executive of Asia Alternative Asset Partners, a Hong Kong–based firm that seeds and helps investors select Asian hedge fund managers. In Japan, he says, there is “extreme paralysis and risk aversion in the wake of 2008. New allocations to hedge funds are rarer than a sighting of a dodo outside of a museum.”

Looking ahead, the big question for most money managers is whether Asia — and China — can maintain the economic momentum.

David Cui, Hong Kong–based head of China investment strategy at BofA Merrill Lynch Global Research, has doubts about the country’s ability to sustain such a rapid growth pace. “Capital returns are declining in China, partly because of a slowdown in growth and partly because of government policies obliging companies to pay people better and take care of the environment,” he says. “The jury is still out on whether China can jump-start private consumption and investment,” which are vital for sustaining growth, he adds.