Despite the increasingly enthusiastic embrace of passive strategies by more sophisticated institutional investors in Asia, some venerable Hong Kong institutions remain sceptical.
Among them are the Hong Kong Housing Society and Hong Kong Electric Company.
Neither, though, totally rule out using products such as exchange-traded funds (ETFs) in future.
“As an institution, we are a firm believer in active [management],” Alan Liu, head of treasury at Hong Kong Housing Society (HKHS), said on Monday.
“To date, we have not used passive managers, but that does not mean we won’t do so going forward,” he told delegates at an event organised by the Hong Kong Investment Funds Association.
He also conceded that the HKHS had replaced one active manager with a quantitative manager. “So we have been moving towards the passive side,” Liu said.
Speaking on the same panel, Vincent Chow, group treasurer for Hong Kong Electric Company, acknowledged that investing with passive products had its benefits but said his team were firm believers in active management.
“It’s a fundamental belief about whether we should go and seek alpha from our manager or just get the average [returns] offered by the market,” Chow said.
There are challenges to investing in ETFs, he added, such as when a stock slides and a passive index is forced to trim its weighting in that stock, when the more logical thing to do, assuming you believed in the underlying fundamentals of that stock, would be to invest more in it at a lower price.
“There is a lot of soul-searching there,” Chow said.
HARD TO IGNORE
In Asia, asset owners such as large insurers and pension funds have been at the forefront of ETF adoption.
Prudential Asia, for instance, uses passive strategies to make tactical overseas investments. An Invesco survey earlier this month also showed large and relatively sophisticated institutional investors increasingly seeking out external managers with expertise in factor-based strategies, while also building up their own capabilities.
ETFs and exchange-traded products globally are estimated to have a total worth of $4.94 trillion, according to London-based consultancy ETFGI. That represents about 6.3% of the global asset management industry.
There are benefits to going passive but it would also require a big shift in investment behaviour for an institution such as HKHS, Liu said.
“If we decide to go passive … does that mean we use passives as an asset allocation tool? In that case, I [would] need to make a decision on which sector [to] go passive," he said. "That is a big change in our [investment] philosophy,” he said.
While he is keen to consider new investment ideas, getting such ideas approved by HKHS’s relatively conservative investment committee can take time and be a long-drawn process, he added.
Even so, given the relatively low cost of investing in passive/index-tracking products and their growing proliferation, it is getting harder for asset owners to completely ignore them.
Passives possess the low-cost advantage and can be highly efficient when accessing certain markets, Hong Kong Electric's Chow acknowledged.
So it's hardly surprising that Asian asset owners are increasingly using ETFs to diversify into global markets, a survey in May showed.
Passive investing could also pose problems for active managers further down the road, according to Liu.
"With more assets going into passives, the active manager will [increasingly] find it difficult to add value,” he said. “Asset owners will need to see if they can find active managers who can deliver value; it is another issue we need to deal with down the track.”
“But increasingly, as we take more control of our investment programme, we will use a mix of different products in our portfolio,” he said.