Money Management (I): Asia 100

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Even as Japanese stocks drifted lower over the past 13 years, remarkably few international asset managers gave up on the market. Finally, their resolve is being rewarded.

The $5 trillion Japanese economy is on the mend, with GDP up 6.1 percent in the first quarter. In July, despite second-quarter growth slowing because of higher oil prices, the Japanese government raised its GDP growth forecast for the fiscal year ended March 2005 from 1.5 percent to 3.5 percent. The Nikkei 225 index rose 15.8 percent, to 11,326, in the 12 months through July 31, still a far cry from the 1989 high of 39,000 but an important step in the right direction.

Japan's resurgence is echoed around the entire region, as investors warm to pension reform and improving economic prospects that are boosting equity values. One sign of the Asian equity surge: By the end of 2003, the value of stocks held by the top 25 international institutional investors in Asia had soared by 75 percent, to $700 billion from $400 billion at the end of 2002, thanks to strong markets, fund inflows and currency appreciation. For the 12 months through July 2004, Indonesia's Jakarta Stock Exchange index posted the biggest rise, surging by 49 percent, while India's Bombay Stock Exchange Sensex index increased by 36 percent. The Hong Kong, Philippines and Singapore benchmark indexes all rose by more than 20 percent, outperforming the Standard & Poor's 500 index, which gained 11.3 percent, and the FTSE Eurotop 300 index, which rose by 11.1 percent. China's Shanghai Stock Exchange composite index was the only Asian market to fall, shedding 6 percent.

Despite fears that the fast-growing Chinese economy could be a bubble about to burst, money managers continue to be drawn to the country's $1.3 trillion pool of personal savings, which until recently had been barred from investment with foreign firms. Pension reform in several Asian countries, along with growing investor interest in lucrative hedge funds and higher-margin equity products, has prompted fierce competition for mandates. In many cases, fees have fallen as a result.

Notwithstanding the move to equities, bonds remain the investment of choice for Asian money managers, especially in Japan, where the three biggest investors -- Kampo, Nippon Life Insurance Group and Zenkyoren -- held more than $1.3 trillion in bonds, equivalent to 70 percent of their assets, at the end of March. That's up from 60 percent of total assets a year ago. One popular innovation: floating-rate funds to play the expected rise in local interest rates. Deutsche Asset Management's version, Floater Alpha, has attracted more than $270 million since its launch in July 2003.

"Asset management in Asia is at the take-off stage," says Lim Heong Chye, managing director of DBS Asset Management in Singapore, which has grown its assets threefold, to 10 billion Singapore dollars ($5.8 billion), in the past three years.

Overall, total assets of the Asia 100, Institutional Investor's annual ranking of the region's biggest money managers, increased from $6.3 trillion to $7.3 trillion, a 15.9 percent jump. Japan, which claims about 75 percent of all institutional and retail assets in the region, once again led the Asia 100. The top 25 Japanese money managers increased assets under management by 11.9 percent, to $4.7 trillion, as of March 2004. No. 1 Kampo (Japan's Postal Life Insurance Service), dipped again over the past year, from ¥111,106 trillion ($1,052 trillion) to ¥108,478 trillion as of March 31, 2004, largely because it had so little invested in equities. But in U.S. dollars, Kampo's assets increased from $927 billion to nearly $1.03 trillion as the yen strengthened by 12 percent during the year ended March 31, 2004. No. 2­ranked Nippon Life Insurance Group increased its assets by a hefty 18 percent -- or $74.7 billion -- to $485 billion.

Especially striking was the increase in international manager assets, which grew from $827 billion to $1.1 trillion. Among the big movers was giant insurer AIG Global Investment Group. With its acquisition of GE Edison Life Insurance Co., a Tokyo-based asset manager, AIG tripled its assets, from $10.5 billion to $30.6 billion. Barclays Global Investors increased its Asian assets from $80 billion to $134.6 billion; Capital Group rose from $61 billion to $103.1 billion. State Street Japan, which opened its doors in Tokyo in 1990 just after the bubble burst, saw its assets increase by nearly 50 percent last year. Overall, it has nearly tripled its assets in Japan, from $15 billion at the beginning of 2002 to $42 billion as of June 30.

According to New York research firm Lipper Fund Analysis, U.S.-based international equity funds increased the Japan weighting of their portfolios from 15.9 percent in June 2003 to 19 percent at the end of April 2004. That's clearly welcome news for foreign firms that have stuck it out in Tokyo. "Japan's a today market," says Mark Lazberger, chief executive and president of State Street Japan. "There's a growing level of interest from outside the region from investors that have been underweight Japan for a decade."

In many ways, though, Asia remains a challenging environment for money managers. The Asian financial crisis of 1997­'98, the bear market in Japanese stocks, the bursting of the U.S. stock market bubble in 2000 -- all have taken a toll. Japanese retail investors remain especially skittish about stocks, despite the Nikkei index's strong recovery and the fact that banks pay well under 1 percent deposit rates.

"The retail market is still fairly dormant," says Adam Goff, chief investment officer at Russell Investment Group, which manages $1.7 billion in Tokyo. "Plain-vanilla Japanese equity is still to be lifted off the ground."

By contrast, China boasts a surging economy, though the pace of growth has recently begun to slow a bit. At the end of March 2004, total funds under management in China stood at $25.9 billion. The biggest Chinese investor, by a wide margin, is the National Council of Social Security Fund, a state-run pension scheme established in 2000, whose assets totaled $16 billion. Ranking second and third were the largest asset managers in China, Boshi Fund Management Co. and China Southern Fund Management Co., with $3.6 billion and $3.5 billion, respectively.

The Chinese securities markets became considerably more accessible to outsiders in December 2002, when a new law allowed foreign firms to register as qualified foreign institutional investors, or QFIIs, and invest directly in Chinese stocks and bonds. This July the leading QFII, Switzerland's UBS Group, said that the Beijing government approved its request to increase its QFII allocation from $600 million to $800 million. That same month the Bill & Melinda Gates Foundation became the 17th foreign investor to receive a QFII license.

Since October 2002 the Beijing government has allowed foreign firms to own stakes of up to 33 percent in asset management joint ventures with local partners. Fifteen foreign asset managers have taken advantage of their newfound freedom, including AIG, which announced in July that it would take a 33 percent stake in AIG Huatai Fund Management Corp. DBS's Lim says his firm is currently holding talks with several potential partners, and French bank Crédit Agricole is also seeking a Chinese partner for its asset management business.

"China is a challenging market, especially when it comes to finding the right people," says Mark Konyn, chief executive of Allianz Dresdner Asset Management in Hong Kong, "but there's certainly liquidity there." His firm's joint venture Guotai Jun'an Allianz Fund Management Co. launched its first China fund in July 2003, raising 3.7 billion renminbi ($450 million). A second fund, the Desheng Enhanced Small Cap Fund, launched in March this year, was even more successful, bringing in more than Rmb8.3 billion. "That's the largest fund we've ever launched in the region," says Konyn.

The assets of the trio of India's largest institutional investors -- State Bank of India Group, Life Insurance Corp. of India and UTI Mutual Fund -- fell by more than 5 percent, to $93.7 billion, from the year-earlier period, despite the fact that the rupee gained 5.4 percent against the dollar. The fall reflects the demise of third-ranked, government-run Unit Trust of India, which was broken up in February 2003 after a series of government bailouts. UTI Mutual, Unit Trust of India's successor, has just $4.4 billion in assets, compared with its predecessor's $11.3 billion.

But India is pulling in strong foreign flows. According to Massachusetts-based Emerging Portfolio Fund Research, which tracks the flows of 210 funds around the world, India has received $1.3 billion of inflows this year through June 30, versus a paltry $18.7 million for the same period last year. "India, like China, is growing fast as a target for investment," says Lieven Debruyne, a managing director and regional head of investment solutions at Deutsche Asset Management, which recently expanded its Indian offices to accommodate growing investor demand.

Pension fund reform is also encouraging further optimism among money managers. In Hong Kong the Mandatory Provident Fund, the four-year-old state-mandated corporate retirement fund that covers about 85 percent of the working population, grew its assets from $7.1 billion to $11.5 billion during 2003. Investment managers expect to benefit as other governments launch similar programs across the region. In Taiwan, for instance, lawmakers passed a law in June requiring employers to deposit a minimum of 6 percent of their workers' salaries into retirement funds.

"There's the potential for this region to develop a very large pension industry, even bigger than in Europe," says Allianz Dresdner's Konyn. "Central funds are accumulating quickly, and the authorities have the motivation to get that out into the private sector."

The Japanese government, meanwhile, pushed through legislation in June that will raise pension contributions to a notional 18.30 percent of salary by 2017 from the current maximum level of 13.58 percent. Many Japanese workers resent the increased burden, and the opposition Democratic Party has declared that it would repeal the law. The increase, designed to ease funding fears as Japan's baby-boomer generation approaches retirement, is expected to take effect in October 2004, with an annual rise of 0.354 percent per year until the total contribution rate tops out in 2017.

Like money managers everywhere, Asian asset managers are enjoying widespread enthusiasm for hedge funds among institutional and high-net-worth investors. According to Eurekahedge Advisors, a Singapore-based consulting firm, the number of Asian hedge funds increased from 162 at the start of 2002 to 413 in April 2004. During that period hedge fund assets nearly tripled, to $48.5 billion.

In Japan, where a decade plus of anemic equity returns has stoked demand for absolute-return products, interest in hedge funds has been especially strong. Assets in Japan-only hedge funds were up nearly 50 percent for the first six months of this year, to a recent $15 billion. "Hedge funds are selling like crazy," says Russell's Goff. "There's been a secular change in the market -- investors have made hedge funds a core part of their thinking."

One local State Street hedge fund, Japan Market Neutral LS Strategy, launched in April 2001, reported assets of about $780 million at the end of June. In marketing and managing hedge funds, as in all asset classes, money managers have learned to respect the important differences among the various Asian markets. "Each market has its own language, regulatory framework and investment history," says Allianz Dresdner's Konyn. "This isn't a region you can run by remote control from another part of the world."

How the rankings were compiled

Institutional Investor's tenth annual ranking of Asia's largest institutional investors includes banks, insurance companies, pension funds, independent fund managers and firms domiciled in 12 Asian countries, as well as 20 international managers with significant investments in the region, though their assets are not necessarily managed in Asia. Subsidiaries with substantial assets under management have generally been listed separately.

New York­based Senior Associate Editor Tucker Ewing, with the assistance of Researcher Katsuko Usami in Japan and Contributing Editor Donald Kirk in South Korea, compiled the rankings from a variety of sources, including questionnaires filled out by the institutions themselves. II refined this data through follow-up faxes, e-mails and telephone calls. Researchers also culled information from annual reports, company Web sites, local regulatory agencies and other public sources. When no official data were available, II obtained figures from actuaries, brokerages and consulting firms. Estimates, which are footnoted, account for the remaining numbers. When possible, figures are broken into regional and asset categories.

II seeks to present numbers that are as comparable as possible, given the different levels of disclosure and varying accounting practices in use across Asia. 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, 2003, unless otherwise noted. Figures were converted to dollars using year-end 2003 exchange rates. For Japan and South Korea, all figures and exchange rates are as of March 31, 2004, unless otherwise noted.