Although Asian investors cite saving for retirement as a chief concern, few are taking the necessary steps to prepare for it and, in some cases, have started saving too late, according to Manulife Asset Management.
In Asia, 40% of investors’ capital is held in cash and bank deposits, which are historically very poor investments, as they provide low or negative real rates of return. "By staying in cash, investors miss out on better and longer-term investment opportunities,” the survey notes.
These cash levels are extremely high especially when compared to US households, which have only 24% in deposits, notes Michael Dommermuth, president of international asset management at Manulife AM.
“What’s even more telling is that [some of] these are financially accomplished investors in Asia,” he tells AsianInvestor, noting that those surveyed include retail investors in China, Hong Kong, Indonesia, Japan, Malaysia, Singapore and Taiwan.
While Asians have accumulated a lot of wealth, on average they’ve received far lower returns than Americans, given their high cash holdings, he says. Americans meanwhile, are “do it yourself-ers who compile private portfolios of debentures, bonds, certificates of deposits and equities in addition to their pensions”, which over time generate decent returns.
Why do Asians have such high amounts of their money in cash? “We think it’s the lasting legacy of a bygone era,” Dommermuth says. Historically, Asians rely on familial support – grandparents move in with their children, who help cover their living costs.
But a number of factors – declining fertility, higher divorce rates and families moving into smaller apartments – are contributing to changes in the old familial support system.
Manulife’s research finds that regionally, 42% of investors think they will be providing financial support to their parents, but only 19% expect the same support from their children. Sentiment was quite negative in China, Japan and Taiwan; 69% of working Japanese professionals do not expect their children to be able to support them, while the numbers rose to 76% for China and 77% for Taiwan.
“This is significant,” Dommermuth says. "This shows they’re taking care of children and elderly parents now, which constrains household savings and, furthermore, suggests individuals are increasingly [holding] themselves accountable for their own retirement security."
In addition to relying on savings, the region’s retail investors expect some support from pensions, but development of retirement schemes in Asia lags those in Europe and the US.
“Therein lies a challenge. A lot of pensions are not lifetime annuities, but primarily a lump sum. And those lump-sum payoffs typically don’t last,” Dommermuth says. In Malaysia, for example, lump-sum payoffs typically only last three years on average after an employee has retired.
Some expect to rely on salaries and wages to fund their retirement, which suggests they may continue to work into their retirement years. But this is not a viable option either, as it is not in an employee's control, he notes.
In an effort to help investors meet their retirement needs, Manulife AM is focused on building out its regional asset allocation team, which was formed last spring. The firm hired Sarah Lu from Axa Investment Managers in May 2012 as head of asset allocation for Asia, and is now looking to add more the coming months.
“There are a lot of concerns among [Asian] investors relating to volatility and risk,” Dommermuth says. "They have a history of investing in bank deposits, and if they do invest in something else, they need to be comfortable with the predictability of the income and volatility."
Products that offer a level of predictability and relatively low volatility include target-date funds, where the asset allocation changes as the contributor nears retirement.
The firm is also looking to launch more diversified income funds. “For example, rather than launch an equities fund [solely] invested in Hong Kong, we’ve got an Asia-Pacific equity income strategy," says Dommermuth. "And in Taiwan, we recently launched a multi-asset fund aimed at maintaining consistency."