The asset management industry in Asia has undergone some big changes since AsianInvestor started in 2000. Having served as the title's founding editor and, more recently, as editorial director at Haymarket Financial Media, I’ve enjoyed a front-row seat. As my final contribution for AsianInvestor, I have come up with a list of what I consider the top five issues facing the industry.
Yesterday we looked at whether asset managers can be 'too big to fail'. Here is question number two.
Can pension funds and insurance companies survive zero or negative interest rates?
These institutions, the most important set of clients to the buy side, face the growing prospect of ‘legacy spreads’ and insolvency. Whatever the merits of monetary easing or excessive credit creation, the biggest institutional victim has been the liability-driven investor. If central banks succeed in reigniting inflation, all may turn out well enough. But there is no sign as yet of inflation returning.
Japanese society has managed to engineer a decline in expectations by policyholders and pensioners; over the past two decades, terms have been renegotiated. But Japanese institutions also had the ability to invest overseas, into US Treasuries for example, in order to achieve a better return.
That is no longer a luxury available to institutions in Japan, or anywhere else. Nor are retail concoctions invented in Japan – such as income-dividend funds that piggyback currency plays on top of global bond products – likely to work as well.
The almost universal answer these days is to extend the search for yield into alternative assets. Private funds, be they aimed at companies, real estate or infrastructure projects, broadly come in two types: about 25% of them deliver excellent returns, and the other 75% lose money net of fees. The ratio is even worse for venture funds. It’s hard to see how alternatives alone can save liability-driven investors.
Japan’s institutions now face the reality of negative interest rates, but will they figure out a new response? And what are they willing to pay if asset managers can’t help them meet their objectives?