Lieven Debruyne, chief executive officer at Schroder Investment Management in Hong Kong, talks to George Mitton about local-to-local business, the growth of pensions and how Asian investors were burnt in the crisis.
Most of Asia came late to mutual funds and only began buying them between 2005 and 2007 at the tail end of the equity bull market, says Lieven Debruyne, Schroders’ chief executive officer in Hong Kong.
Those new fund buyers wanted big returns and chose equity products, but their decisions proved costly when the financial crisis hit.
“A relatively high percentage of investors experienced negative returns. And quite often that was one of their first experiences of investment with a mutual fund. That has shaken investors’ confidence.”
Debruyne says these bad experiences are one reason the take-up of mutual funds in most Asian countries is still in the single digits as a proportion of all savings – well below the rates seen in Europe and the US.
He also acknowledges that some public scandals, such as alleged mis-selling of Lehman minibonds, have diminished consumer confidence in financial products. In combination, these factors have meant that Asian demand for mutual funds has not bounced back as quickly as might have been expected after the financial crisis.
But Debruyne is not discouraged. The relatively low penetration of mutual funds means there is more space to grow, he says. And long-term trends point toward a large appetite for funds: the middle class in Asia is growing; many Asian countries have an ageing population and fairly undeveloped pensions markets; most importantly, savings rates are high – much higher than in many developed markets.
All that is needed is to convince Asians to put their money into mutual funds instead of into property, gold or bank deposits.
Debruyne has been regional head of Schroders’ intermediary business, Asia, since 2005. Since 2008, he has also been chief executive officer of the investment manager’s Asian business, based in Hong Kong.
His working life has frequently involved Asian countries. Not long after starting his investment career in the early 1990s, he moved to Hong Kong as a fund manager. Some years later he managed Asian product sales for Schroders from London, and he has since done a stint at Deutsche Asset Management in Tokyo.
Debruyne now finds himself overseeing a funds business that spans all the major Asian markets, except India. Last year, Schroders celebrated 40 yeas in Hong Kong. Its strategy is to offer both offshore funds and local-to-local products.
The latter strategy means “being able to offer a local Indonesian equity fund to investors in Indonesia, a Taiwanese bond fund to Taiwanese investors”, he says.
It is crucial to Schroders’ growth plan, he says, to have local investment operations to meet the requirements of local regulators; a network of sales offices connected to a centralised investment house is not enough.
Hong Kong and Singapore are different because Schroders can sell its Luxembourg-domiciled products here. But elsewhere, having investment staff on the ground with the necessary licences to invest in local assets is a prerequisite for gaining market share. Debruyne says this aspect will become increasingly important as Asia’s pensions system develops.
“Being able to offer a local investment solution will be key because regulations and investment restrictions will require a very high component of local bonds and local equities,” he says.
Debruyne predicts that mandates will simply not be available to asset managers that do not have the correct licences or do not have products invested in local assets.
However, the expansion of Asia’s pensions system is a development that is still to come. For now, a key area of focus is providing products that match Asian investors’ cautious attitude.
Stung by bad equity performance during the financial crisis, many Asian investors have become even more conservative and are choosing low-risk products, namely fixed-income and multi-asset funds.
“Leading up to the financial crisis, up to three-quarters of demand was for equity funds. That’s reversed and, in many markets, more than half the funds sold are income funds,” says Debruyne.
Schroders launched its Asian Asset Income fund in Hong Kong last June, a product designed to appeal to this cautious investor base. It has since raised more than $1.4 billion in Hong Kong alone. The fund offers a low-risk structure with a regular payout that beats inflation.
Debruyne says income products will continue to grow and Schroders is investing in multi-asset funds to serve this part of the market.
In addition, he predicts demand for total return or absolute return products, which seek to deliver a positive return in all market conditions.
“Sentiment is still quite cautious and there will continue to be a significant part of the market for income funds,” says Debruyne.
“If equity markets continue to show strength, there will be greater demand for equity products. But I do not believe the demand for income funds or total return strategies will disappear, it’s a part of the market that’s here to stay.”
There are other interesting products around, notably funds that focus on the internationalisation of the renminbi, such as renminbi qualified foreign institutional investor funds (RQFII).
An expansion of the dollar-denominated qualified foreign institutional investor programme, RQFII means Chinese asset managers can establish renminbi-denominated funds in Hong Kong and then invest back into in China.
The offshore dim sum market is also growing, raising Hong Kong’s status as the primary offshore renminbi centre.
“If you think about product innovation, anything around this part of the market will continue to see development and demand,” says Debruyne.
Schroders launched a renminbi bond fund in October 2010 and Debruyne says it has now raised more than $1 billion. It is sold through professional investors as it is still not authorised for retail sales.
Debruyne says it is important to remember that Asia is less homogenous than Europe, with customs and laws varying greatly from country to country.
If he is right that mutual fund penetration is destined to rise in this region, Schroders’ strategy of establishing local operations with local licences may well be prudent.
©2012 funds global