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How quickly they forget

Rising markets, faster growth and increasing real estate values. Asian money managers are back on the fast track.

When Simon Rigby, head of Schroder Investment Management in North Asia, arrived in Hong Kong from London two years ago, he found it a gloomy place. Pessimists forecast that Hong Kong's Hang Seng index, at 7,000, already off more than 50 percent from its 1997 high of 16,660, could plunge to 2,000. The highest interest rates in a decade had sent property values into a tailspin, and economists seemed to slash their growth predictions for Asian countries almost daily. Rigby battened down the hatches to wait for the storm to pass.

It didn't take long.

The Hang Seng now trades above 15,000, property values have come back, and the Asian Development Bank foresees regionwide economic growth this year of 6.9 percent, even bigger than last year's healthy 6.1 percent gain.

A January review of London-based Schroders' global strategy, following the sale of its investment banking business to Citigroup's Salomon Smith Barney, concluded, says Rigby, that "continental Europe and Asia will be the engines of growth for the asset management business on a three- to five-year view."

Although there is debate about what countries and industries will grow fastest, most agree that Asia has regained its pivotal role in global expansion strategies. "The U.S. seems to have reached maturity," says Blair Pickerell, head of Hong Kong-based Jardine Fleming Asset Management. "If you are sitting in New York or Boston, you start thinking about where you are going to get your growth and then you start thinking about the Asian miracle."

Evidence of resurgent interest in Asia can be seen throughout this year's Institutional Investor rankings of Asia's top 100 money managers. Chase Manhattan Corp. agreed in April this year to pay $7.73 billion to buy U.K.-based Robert Fleming Holdings, one of whose jewels is Jardine Fleming Asset Management. (It should be noted that only 1999 acquisitions figure in these rankings. Those occurring in 2000 will affect next year's roster.) In June 1999 Principal Financial Group of Des Moines, Iowa, spent $1.38 billion to buy Bankers Trust's fund management arm in Australia and Asia from Deutsche Bank. Principal is now the 15th-largest international asset manager with assets invested in Asia.

Foreign buyers kept especially busy in Taiwan, where the further opening of the mutual fund market and the promise of access to corporate and government pension fund assets - perhaps within months - brought renewed interest. ABN Amro Holdings purchased an 82 percent stake in Kwang Hua Securities Investment Trust & Co. for an undisclosed sum in June, and Citigroup paid $750 million for a 15 percent stake in five companies in Fubon Group, including Fubon Securities Investment Trust. State Street Global Advisors and top-ranked Taiwanese manager Cathay Life Insurance Co. formed a joint venture company to compete in the local mutual fund market.

In South Korea, meanwhile, a consortium led by American International Group and W.L. Ross & Co. bought a controlling stake in third-ranked Hyundai Investment Trust Management Co. for approximately $250 million.

Foreign money managers didn't make any new acquisitions in Japan or Australia, but industry consolidation continued at a rapid clip in those markets. Commonwealth Bank of Australia paid A$5 billion ($2.74 billion) to take over Colonial First State Investment Managers. In January 1999, top-ranked money manager AMP took over GIO Australia Holdings. Late last year it further fortified its position as the country's biggest money manager when it bought the 43 percent of GIO that it didn't already own. Some firms changed names: Morgan Grenfell (Australia) is now known as Deutsche Asset Management (Australia), and National Mutual Funds is now AXA Asia Pacific.

Deregulation of the insurance industry prompted continued consolidation and cooperation in Japan. Among major realignments, Dai-Ichi Mutual Life Insurance Co., ranked fifth, and Yasuda Fire & Marine Insurance Co. announced early last month that they would cross-sell and jointly develop insurance policies in one of the first tie-ups between major insurers with different product lines. Shortly after that, Asahi Mutual Life Insurance Co., Nichido Fire & Marine Insurance Co. and Tokio Marine & Fire Insurance Co. announced they would cross-sell each other's policies and jointly develop new ones. They said they would eventually merge and invited Meiji Life Insurance Co. to join them.

As the gloomy aftermath of Asia's financial crisis lifted, emphasis across the region shifted to seizing new growth opportunities. In Hong Kong 44 pension product providers rushed to sign up employers that will on December 1 begin contributing to a new defined contribution pension scheme for the city's 2 million workers who are not covered by voluntary corporate plans. The Mandatory Provident Fund is projected to produce first-year contributions of $1.3 billion to $1.9 billion and to accumulate assets totaling $130 billion by 2030. Tough competition should narrow the field to as few as ten providers. Hongkong & Shanghai Banking Corp. and an alliance between American International Assurance Co. and Jardine Fleming almost certainly will be among them.

Those firms standing on the sidelines may yet enter the fray. "We're waiting for the assets to grow a little bit and trying to evaluate who the key players are going to be," says Brian Haskin, head of Barclays Global Investors for North Asia. "Once there is consolidation, we will see enough assets to make it interesting to BGI."

Singapore has also attracted a steady stream of foreign fund managers: State Street Global Advisors set up a new fixed-income unit, and Barclays Global Investors plans to open an office early next year. The government is determined to attract more fund managers to the island republic and continues to deregulate its centrally run mandatory pension scheme, the Central Provident Fund. A revamping of rules governing the scheme several months ago freed up a potential $21 billion in new assets for investment in mutual funds. The Government of Singapore Investment Corp. and other government-linked entities continue to award a steady stream of investment mandates to foreign fund managers. Fidelity Investments' head of institutional business in Asia, Douglas Naismith, says Singapore is today the third most important market in Asia, after Japan and Hong Kong.

Singapore's Southeast Asian neighbors aren't faring as well. International investors marginalized the markets of Indonesia, Thailand and the Philippines in 2000 as the focus switched to technology, media and telecommunications stocks. "As far as global investors are concerned, it's North Asia plus Singapore, India and possibly Malaysia," says Naismith.

These sophisticated investors, Naismith reports, are especially concerned about currency risk, particularly when managing fixed-income portfolios. Many seek to hedge their portfolios. They are moving, too, toward alternative investments, as more institutions are willing to consider, for example, high-yield emerging-markets debt as a portfolio component. More and more, South Korean and Taiwanese institutional investors look to diversify their portfolios internationally.

Japan, meanwhile, came back to life. As ¥106 trillion ($100 billion) in ten-year, fixed-interest Postal Savings Bank deposits (see Japan) mature over the two-year period that began in April - and with a U.S.-style defined contribution system likely to be introduced in 2001 - money managers are jockeying to manage these assets.

Still, foreign mutual fund managers experienced a small setback in Japan this year. Their share of investment trust assets, which totaled slightly more than ¥60 trillion at the end of June, fell to 7 percent, down from 10 percent at the beginning of 1999. An exodus of money from foreign bond funds following the yen's sharp appreciation against the dollar late last year triggered the outflow, which was exacerbated by a sharp appreciation in Japanese equity prices.

"Japanese investors thought foreign managers had a magic hand," says Mikio Takado, head of marketing at Jardine Fleming Investment Trust and Advisory Co. in Tokyo. "After Japanese investors lost money in foreign bond funds, this myth ended, and they became a little bit skeptical about foreign asset management companies."

Experts anticipate only a temporary loss of market share for foreign firms. When Japanese investors become more comfortable with the idea of mutual funds, as they are bound to do once a local version of a 401(k) plan is introduced, they will probably allocate more money to top-performing fund managers. Today just 2 to 3 percent of personal financial assets are allocated to mutual funds. Takado conservatively predicts that money invested in mutual funds will grow from ¥60 trillion at the end of June to at least ¥75 trillion in five years.

"There are a lot of challenges in trying to enter the market and in particular finding and attracting and retaining the right types of people," says Richard Nuzum, a senior consultant with William M. Mercer in Tokyo. "But if a firm has solved that and has good investment product, it's probably going to grow assets more quickly in Japan than it would in any other market in the world. This is a relatively easy market in which to pick up assets."

No one would describe China as a simple market, but money managers are excited about prospects on the mainland. Indeed, as Beijing prepares to allow the launch of the country's first open-ended mutual fund, probably before the end of the year, a mild bout of China fever is breaking out.

Among the big names signing advisory and technical cooperation agreements with China's fledgling asset management companies: Jardine Fleming (with Huaan Fund Management Co.), State Street Global Advisors (with Industrial and Commercial Bank of China), Schroders (with China Asset Management) and Invesco Funds Group (with Penghua Fund Management Co.). When the law allows, these alliances could lead to equity participation. Under an earlier World Trade Organization accord hammered out with the U.S., China agreed to allow foreign fund managers to set up joint ventures in which they can own a stake of up to 33 percent, rising to 49 percent three years after China's accession to the WTO.

"You cannot not have China in your plan," says Vincent Duhamel, Hong Kong-based head of Asia operations for State Street Global Advisors. Schroder Investment Management's Rigby believes that the Schroders-China Asset Management joint venture could accumulate assets under management worth $1.5 billion in two years.

One senior fund management executive sounds a more skeptical note. China, he says, represents the worst kind of opportunity, one where "1 billion people have $2 each to invest." That means high costs and low returns for the manager. Pickerell of Jardine Fleming concedes that earnings in China "will be pretty unappealing during the next ten years," since numerous rules and compliance problems will make operations expensive and difficult. He notes, however, that Jardine Fleming faced a similar situation 16 years ago, when it became the first foreign fund manager to set up shop in Taiwan. "Who dreamed then that 16 years later this little thing you started would be a major piece of a company that Chase just paid $8 billion for?" asks Pickerell. "And Taiwan is nothing compared to what you can do in China. It's going to take a lot of work and it's going to take another 20 years, but you'll wake up one day and you'll have created one of the world's biggest fund management companies."

Still, not all money managers are racing into China. Principal International Asia regional chief Rex Auyeung says he is watching developments there "from 30,000 feet." Before getting involved in the China mating game, he wants to see more detail on the rules and regulations that will be drawn up for foreign managers. "China is not my top priority," says Auyeung. "India and Japan are."

Yes, India. "India would be more attractive in the short term than China," says Fidelity's Naismith. He predicts that India is likely to open its market more quickly and to deploy a model that is friendlier to foreign fund managers. Auyeung expects "vertical growth" from India following his company's September launch of a family of mutual funds there and the establishment of a joint venture with Industrial Development Bank of India.

Then there's the prospect of pension money. If plans to establish a new Indian pension agency later this year are implemented, $40 billion in new assets could be available to money managers over the next decade. Still, says Auyeung, "even if pensions legislation comes a little bit later, that's okay. We are very hopeful that within 12 months we can accumulate $1 billion in mutual fund assets."

Two years ago such predictions would have inspired hoots of laughter. Says Schroder's Rigby, "It's amazing how fast things have recovered."

How the rankings were compiled

Institutional Investor's sixth annual ranking of Asia's largest institutional investors includes banks, insurance companies, pension funds, independent fund managers and firms domiciled in 11 Asian countries, as well as 15 international managers with significant investments in the region, though the assets are not necessarily managed there. Subsidiaries with substantial assets under management have generally been listed separately.

New York-based Assistant Editors Laura Witkin and Erika Ihara, overseen by Senior Editor Jane B. Kenney, compiled the rankings from a variety of sources, including questionnaires filled out by the institutions themselves. Hong Kong Bureau Chief Kevin Hamlin provided assistance. In many cases, II refined this data through follow-up faxes, e-mails and telephone calls. In some cases, II's researchers culled information from annual reports or tried to get data from finance ministries and regulators. When no official data was available, II obtained figures from actuaries, brokerage firms, consultants and company Web sites. Estimates, marked with a footnote, account for the remaining numbers. When available, figures are broken into regional and asset categories.

II staffers sought to make the numbers as comparable as possible given the different levels of disclosure and varying accounting practices in use across Asia. In most instances, the "other assets" column includes loans. Inevitably, there is double-counting of assets in some countries because of the lack of disclosure standards and the variety of sources needed to reach an approximate total figure for some money managers.

Because of currency conversion and rounding, breakdown figures may not add up to the sum of total assets. All figures are in millions of dollars and are as of December 31, 1999, unless otherwise noted. Figures are converted to dollars at year-end-1999 exchange rates. For Japan all figures and exchange rates are as of March 31, 2000, unless otherwise noted.

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