Asia needs more independent asset managers

Asia needs more 

independent asset managers

The financial sector is generally far from impressive

In 1998, as the Asian financial crisis raged through South Korea and the rest of the region, Sung Taek Hwang decided to leave his comfortable position at Hyundai Financial to establish his own independent securities firm. It was not an auspicious time. The Korean won plummeted, dragging down many companies that had borrowed dollars and no longer had the ability to repay.

Many of them, most notably Daewoo, did not survive, while others were sold to foreigners. In retrospect, though, the timing proved more fortuitous than it initially appeared. Today, Truston Asset Management, the firm Mr Hwang founded, has $6.5bn under management, his investors include the sovereign wealth funds of Abu Dhabi, China and Norway, and his largest client is the widely respected National Pension System of Korea.

Truston has one of the best records in the country for managing money on the Korean stock exchange.

The story of Truston is notable both for Mr Hwang’s achievement and his aspirations. One of the problems in Asian equities markets from Mumbai to Seoul and Taipei is that they remain momentum-driven, one-sided markets.

One reason for that, Mr Hwang believes, is that so many asset management groups are not sufficiently independent. Instead, they are part of larger business groups and their primary purpose in life is to support their parent groups. Asia needs independent asset managers who can police corporate groups, not merely further their interests.

In India, for example, BlackRock is virtually the only independent fund management firm. Indeed, in some cases such as in Seoul, the big local groups establish mutual funds whose sole mandate is to invest in their group companies.

Many of them rotate their managers between their subsidiaries, so the top executives lack in-depth experience. And most investors place their money with these firms because of the appeal of their brands rather than because of their track records. That means Asian asset managers have not been impressive. “Asians have built successful toy companies but they have not cracked it in asset management generally,” says the head of global equity sales at a major Wall Street firm. “Nobody can name a single local asset management firm in many markets.”

Asian stock markets have other shortcomings as well. The free float of many companies even in markets like Hong Kong is tiny because owners are reluctant to lose control and therefore liquidity is a problem.

Moreover, much of the volume comes from retail investors who are driven more by sentiment than hard analysis.

The markets need more institutionalised, agnostic money managers who buy when stocks are cheap and sell when they are dear. The result is that Asia remains dependent on bank financing. Neither its bond markets nor its equity markets are robust enough.

The contrast is especially glaring in South Korea, where manufacturers are impressive and the financial sector is generally far from impressive. But as long as the financial sector lags behind, Korea’s awesome companies remain more dependent than they should on international capital markets. This matters most when times aren’t great. Asia has had a good decade and arguably even the global financial crisis had a less devastating and more brief impact on Asia than elsewhere in the world. But today, Asia is slowing and will continue to do so, partly as the effects of easy money in the developed world begin to make life more complicated for central banks in the region.

Moreover, the US current account deficit is shrinking dramatically, which means that dollar liquidity is leaving the region.

Growth is already slowing and current accounts are veering from surpluses into deficit in many parts of the region. Asia’s collective current account surplus peaked in 2007 at 7.4 per cent of GDP, according to data from Capitol Research – today it is under 2 per cent of GDP.

Savings ratios are also turning down. All this means that the cost of capital will inevitably continue to rise.

Nobody in India outside the government expects the growth rate in India to return to 8 per cent anytime soon. Distressed companies in India missed the window to raise equity while Indonesian companies are finding themselves in similar straits.

South Korean GDP growth slowed to 1.6 per cent year-over-year in the third quarter, its worst performance in three years.

More discerning equity markets could help. Local currency bond markets could make an even more dramatic difference.

One lesson of the global financial crisis is that financial markets can be overly developed. But the lesson of Asia is that financial markets can remain underdeveloped as well.