Medium-sized institutional funds in Asia need to engage more in the investment process to ensure better returns, according to consultants with considerable market experience.
Elvin Yu, who was previously head of Asian institutional business at ICBC Credit Suisse and Allianz Global Investors, told AsianInvestor that inadequate monitoring and governance could be leading to underperformance among pension, endowment and family office funds that are typically too small to use asset consultants.
His experience with medium-sized funds – anything from $10 million to $100 million – convinced him of the need to tackle the issue. In Hong Kong, he has identified around 400 schemes, out of the 4,000 covered by the Occupational Retirement Schemes Ordinance (ORSO), that he believes “should look after their pensions in a more stringent way”.
Over his career, Yu has seen many defined contribution schemes that were not big enough to have a segregated mandate but would nonetheless be kept under the ORSO umbrella (with new staff put into Mandatory Provident Funds). In these cases, the scheme sponsor would buy off-the-shelf funds and, far from needing the services of a large asset consultants, all they would "need is someone to tell them whether the funds they are investing in are doing well or not," Yu said. "However, a lot of times with companies and schemes of that size, their monitoring is very loose."
“A lot of these clients, they don’t have a regular review," he told AsianInvestor. "They rely on their corporate trustee to arrange meetings, which are done maybe once a year. Some clients would have representatives from finance and HR departments, but typically no one in-house with sufficient expertise to question the fund managers."
The meeting with the fund manager, or their representative, said Yu, would be “be five minutes talking about the past, five minutes talking about the market outlook, and then the room goes dead quiet because the client doesn’t know what to ask.”
Fund managers know they can get away with that because when it comes to off-the-shelf funds they only have to provide the bare minimum of information, a standard package comprising a factsheet and statement, regardless of whether an investor has put in a thousand dollars or 10 million, he said.
“Now,we all know the factsheet doesn’t tell you anything. It doesn’t give you any analysis in terms of the risk profile, the performance attribution, etc," Yu said. "[And yet], typically, I would expect no questions from the client; and that's not right."
Peter Ryan-Kane, formerly head of portfolio advisory for the Asia-Pacific region at Willis Towers Watson and now running his own consultancy, Perk Advisory, said the issue is really about a lack of mission clarity for most pools of capital in Asia, especially small and medium-sized funds. For him, if asset owners don’t know what they are trying to achieve, there is little chance they will get the best outcome or be able to measure it if they do.
Ryan-Kane also agrees with Yu that a lack of a monitoring, or any kind of assessment framework that compares outcomes with a stated mission, makes it impossible for fiduciaries to assess.
“It is like flying with no instruments and a bag on your head. It’s not really the fault of the pilot, more so the aircraft designer who didn’t install instruments and the asset owners who don’t express the mission.”
Yu left ICBC Credit Suisse last August and set up his own firm Goji Consulting, aiming to bridge the gap and explain to small funds and scheme sponsors the issues they are facing. Even some of the larger corporate clients Yu dealt with in Asia were surprisingly ignorant of the need for a reasonable level of fund governance.
“I had one multinational client, whose Hong Kong branch had an ORSO scheme. I met the CFO twice. The second time was a lunch after I won the business. He said, over to you; if you have any questions phone my staff. I called the corporate trustee after nine months and said, how come the client had not asked for a review meeting after onboarding a new fund manager," Yu said. "We arranged a conference call and at the outset, the HR person asked what was the purpose of the call. The only other question was how often would we have these meetings."
Another of Yu’s clients had a head of finance who said his department didn’t get involved in pension matters; that was for HR to deal with. "You can tell with a lot of these clients that pension arrangements are a very low priority," said Yu.
Ryan-Kane agreed: “There is no internal ownership, or the owner is either the accountant who gets a kick from it because it is more interesting than the rest of his job, or the HR department who sees it as an HR issue and not a financial one. In either case, they don’t really have the knowledge or skills.”
Where he would differ in perspective with Yu is on fund managers and their interaction with clients.
“In my experience, the conversations between asset owners and managers is a complete waste of time for all parties. The managers don’t know the clients’ objectives. They don’t know what purpose their little slice of the pie is serving. And in most cases they don’t care, as they want to be able to cluster clients together into pooled funds or uniform mandates to assist economics and compliance.”