Asia continues to lag other regions for integrating ESG principles with investing; better data and stronger regulatory requirements will help institutional investors, market observers say.
The bread and butter of fund management companies are the fees they generate from assets they manage. However, the Asian fund industryÆs bumper four years have come to an end, as financial services research firm Cerulli Associates notes, but not before total assets under management (AUM) crossed the $1 trillion mark and revenues topped $6 billion, a four-year annual growth rate of more than 30%.
AUM numbers have been dipping fast in the past few months due mainly to lower portfolio valuations and partly to redemptions. Mutual fund assets under management in Asia ex-Japan fell by 12% to $991 billion in the first half of 2008 from $1.126 trillion at end-2007, according to Cerulli. By the end of this year, AUM could be down 20% to $915 billion.
The prospects for AUM growth in the coming year are bleak, and the pressure is on to stay in the black.
The most effective way to cut costs is to reduce manpower and several fund management firms operating in Asia have unavoidably gone that route, such as Fidelity and ING Investment Management, which have done some minor adjustments. What these firms have done in Asia is not at all comparable to the purging of staff in the US and Europe. Among the major global fund players that have announced layoffs are Fidelity, AllianceBernstein, Janus Capital and Legg Mason.
Fund houses operating in Asia are still at the stage where they are cutting ôone or two here and thereö says one headhunter in Hong Kong, adding the hope is that there will be no need to do anything more drastic.
Boston-based Fidelity, for example, announced a two-stage layoff of nearly 7% of its 44,400 employees in the US, in line with ôexpense reduction activitiesö. ThatÆs around 3,000 people who will lose their jobs in the US by the end of the first quarter of next year.
To put some perspective to those numbers, Fidelity in Asia employs only around 1,000 people and a spokesperson in Hong Kong says there is no expectation of a concentrated cut in this region.
ôLike all companies in todayÆs environment, we are continuing to manage our costs, including staff costs, so they are aligned with current market conditions,ö says the Fidelity spokesperson. ôThis is an ongoing process to ensure that the business is well positioned to continue to deliver superior products.ö
While Fidelity is among the larger fund organisations operating in Asia in terms of staffing, it is also among the ones that have a significant business in this region. Fidelity placed fourth from the top in AsianInvestorÆs ranking of fund houses in Asia-Pacific in December last year, with an estimated $190 billion sourced from clients in this region. This year, FidelityÆs AUM sourced from the region is likely to have dipped in line with the general trend, but the fund house still ranks among the highest.
A spokesperson at ING Investment Management notes that there have been redundancies made ôto focus on operationsö, but declined to elaborate.
At HSBC, 500 jobs have been made redundant in Asia, with most û or 450 û of those in Hong Kong. The redundancies are across all customer groups and some back office functions. It is unclear if the bankÆs asset management units have been affected or will follow suit, and a spokesman at the bank declined to comment.
ItÆs clear, though, that there are efforts to hold on to as many employees as possible.
ôOver the coming weeks, the bank will make every effort to help ease those affected to look for alternative roles either within the bank or externally,ö HSBC executive director Peter Wong wrote in a letter to all staff.
ôI know many of you are anxious about your own job security, especially bearing in mind the current external economic conditions. In this day and age no guarantee of job security can be given,ö Wong said, adding that HSBC needs to continuously review and make changes to how it operates.
Another headhunter in Hong Kong describes the firings in AsiaÆs fund industry as ôso small they could still be considered anecdotalö. That's not to say, however, that things could get worse next year. For now, a spokesperson at one of the fund houses that has laid off some staff this year notes, there has been ôno ripping of business lines, just trimming off the sidesö.
One significant result of this financial markets fallout is the likely easing of salaries. According to CerulliÆs survey conducted in mid-2008, salaries make up the largest part of operational costs of fund houses in all the major Asian markets except in Hong Kong, where overheads such as office rentals are steep. In Korea, Singapore, and China, personnel costs make up 69%, 53%, and 43% of total operating costs compared with only 33% in Hong Kong. In Taiwan, incentives to distributors make up around one-third of costs.
At a media event in Hong Kong last week celebrating Societe GeneraleÆs 30th anniversary, the firmÆs chairman Daniel Bouton said compensation packages across all business units would have to be reviewed in 2009. Any changes to how Societe GeneraleÆs staff will be paid next year onwards will likely affect bonuses rather than fixed salaries states in existing contracts, an operations executive of the bank says.
Societe Generale hasnÆt announced any planned layoffs in any of its business lines, and in fact, its headcount globally has risen by around 19,000 so far this year to around 150,000. Around 6,000 of that are new hires while around 13,000 are the result of Societe GeneraleÆs purchase of a controlling stake in Russian bank Rosbank earlier this year.
Staff layoffs should be avoided at all costs, says the operations executive at Societe Generale, because the financial crisis is largely a crisis of confidence at this point and confidence needs to be restored by providing continuity with staff interacting with clients. He adds that laying off staff could foster negativity among the bankÆs otherwise generally loyal and long-serving staff.
Bouton notes that Societe Generale is in a position to seize opportunities available in the global financial markets today with the collapse of the traditional Wall Street investment banking model. It could be said that the risk and operational controls implemented by Societe Generale because of Jerome Kerviel û the trader who used his knowledge of the bankÆs electronic risk controls to conceal billions in unauthorised bets in January û has helped it deal with the current financial crisis.
In previous years, the gap between the demand and supply of experienced portfolio managers in Asia led to steep salary rises. Based on a survey conducted by the CFA Institute covering Hong Kong, China, and Singapore, half the respondents indicated an increase in total compensation of more than 20% in the period from 2005 to 2006. Managers in Singapore, Hong Kong, and South Korea are among the highest paid in the region.
Fund managers with good or long (preferably both) track records are in the safest position at the moment. Many have stayed put while some have even been poached by competing firms (though it should be said that new hirings announced in recent weeks are the result of negotiations that began before the markets turned worse in September). Even fund houses contemplating staff reductions acknowledge that investment managers are likely the last to go.
One headhunter in Hong Kong says CVs from marketing, product development, and investment research teams of funds houses have been landing on his desk at a brisk pace these past weeks. ôAnalysts are flying all over the place,ö he notes.
The headhunter adds that in the coming year, senior executives of fund houses û particularly those on expat packages û will be highly vulnerable to extinction if their responsibilities have nothing to do with generating and retaining clients and business.
Reducing costs using all possible means
While firing staff is undeniably the most effective and immediate way of cutting costs, many fund houses are looking to exhaust other options.
"Given the downturn in markets, we are looking at sensible ways to trim costs such as travel, accommodation and entertainment. But we've built the business fairly cautiously and we remain profitable even if margins have come right down,ö says Hugh Young, a Singapore-based managing director at Aberdeen Asset Management Asia. ôSo we don't feel a recourse to job cuts is necessary û much less desirable û and we'd only contemplate such moves as a last resort. The worst thing is to hollow out at the bottom of the cycle."
Other means of cutting costs involve trying to get the best possible deals from suppliers, service providers and distributors.
Societe Generale is aiming to achieve operational savings of Ç1 billion worldwide by 2010, a target set in the second quarter of this year. The savings are expected across all business lines, particularly asset management, private banking and commercial banking. One way of cutting costs is integrating the bankÆs use of information technology (instead of having separate systems available to different business groups) and limiting access to data feeds, for example, to the absolute essentials.
In the case of Fidelity and Axa Investment Managers, the opportunity to cut costs has also come in the form of relocation of their offices in Hong Kong, although the decision to do so was made about a year ago. Fidelity has moved most of its staff from One IFC in the Central district to One Island East in the eastern part of Hong Kong island. Axa Investment Managers is also moving from One Pacific Place in Admiralty to Quarry Bay in the east.
As one spokesperson of a fund house in Hong Kong says: ôAssets have dropped so we cannot continue on the same cost basis. We have to be realistic about the amount of income we can expect in the coming years.ö
The appetite of institutional investors for green, social, and sustainable bonds that bring clear environmental and socio-economic benefits shows no sign of waning.
The German insurer has plans for the property sector in Australia and China too.
Global investors are advised to look selectively at Japanese equities as the country recovers from lockdown and continues to improve corporate governance.
Weekly investor roundup: Sun Life weighs second ESG fund in HK; Korea's NPS reduces domestic equity allocation
Sun Life considers launching second ESG fund in Hong Kong as it banks on the growing theme; NPS lowers exposure to large-cap and other domestic shares; Temasek's Vertex Technology Acquisition Corporation becomes first special purpose acquisition company on the Singapore Exchange; and more