Last night AsianInvestor held its annual dinner for our Investment Performance Awards. Today I’d like to explain not only our thinking behind a few of the marquee awards, but how they reflect trends in the industry. (All the winners have a write-up in the June edition of the magazine.)
The five big awards went to Goldman Sachs Asset Management, Franklin Templeton, JP Morgan Asset Management (twice) and Schroder Investment Management. Several other firms pitched competitively.
These awards were a judgment call by our journalists. We sought to look beyond the confines of asset classes or country expertise, in order to understand the bigger trends driving the industry. The global financial crisis has changed this business and we wanted to be sure our awards reflected that.
Franklin Templeton (Best Business Development)
“Best business development” was our attempt to recognise a company that was enormously successful, preferably one that was also delivering value to its clients. Franklin Templeton had its best year ever in 2011, thanks to having key products that captured the mood post-2008.
Importantly, its success has derived from both fixed income and equities, but its global bond products clinched it. Franklin Templeton began marketing these in Singapore in 2007, before the crisis struck and before fixed income was fashionable.
That is a result of a business philosophy that prizes diversification and long-term asset allocation for retail investors, rather than one of chasing whatever happens to be sexy. But there was more to it than just being diversified: the firm anticipated retail investors’ desire for products that are simple, transparent and deliver a steady income.
Another reason why Franklin Templeton succeeded so far beyond most competitors was its distribution strategy. Its product design was aimed at private banks at a time when these banks were disdainful of mutual funds. The crisis taught the private banks humility and now they are keen distributors of mutual funds. They now make up a significant portion of Franklin Templeton’s business in Asia.
The firm’s executives say this year they are going to be highlighting US equities, in response to distributors’ demand.
Schroder Investment Management (Retail Product of the Year)
Schroders’ Asian Asset Income Fund has been a runaway success, raising $1.4 billion from Hong Kong investors: the kind of blockbuster that makes once-sceptical distributors go begging for a piece of the action.
We did have some reservations about this award because if the fund’s performance doesn’t exceed 6%, which is the amount of income it delivers each year, then the payment comes out of the fund’s capital. In other words, Schroders will take a fee for giving people back their money.
However, there is no doubt that what investors want post-crisis is income. This trend began in Japan and last year took the rest of Asia by storm. It is unlikely to abate soon. Moreover, unlike those income products in Japan (where accounting rules are rather lax about capital charges), Schroders has succeeded in keeping people in equities, through a multi-asset approach. Given the dubious outlook for global sovereign debt, that is a good thing. Moreover, Schroders is pretty up front about the risks to capital.
Schroders as a firm has made a strategic move toward outcome-type investment products, including multi-asset, total return (managed beta) and absolute return. This is based on a belief about the inability of long-only asset management to replicate the achievements of the Great Moderation; by returning to balanced, Schroders is leading the industry back to a more traditional format, where asset-allocation calls matter the most.
Despite this move, Schroders’ executives were nervous about introducing this particular product. Balanced funds in Asia never sold well and it was a gamble. Also, Asian investors want performance. Therefore the decision was made to allocate to high yield and dividend-paying stocks, as well as to commodities.
This fund was developed for Asia, and is domiciled in Hong Kong. It is available for sale in Singapore and will soon be in other markets. But perhaps the most notable sign of the times is that last week Schroders registered a Ucits version of this fund in Luxembourg.
Goldman Sachs Asset Management (Institutional Solutions Provider of the Year)
Volatility has led institutional investors to seek more transparency from their fund managers, and to in-source more. This has required top-tier asset managers to change the way they do business, to become more open and to serve as advisors, not product providers.
In the case of Goldman Sachs AM, that means throwing open the firm to its most important clients. If clients want to learn how to run investments themselves, then help them.
Fund-management companies have traditionally been loathe to reveal too many secrets. If institutional investors can do it by themselves, why do they need a fund manager? GSAM has taken the view that, in some cases, this may turn out to be the case. But if true, then such business is at best temporary anyway.
However, it is finding that the more it opens the door to top clients, the more addicted they become to knowledge transfer. That deepens the relationship. Also, the people at big clients in Asia are now pretty sophisticated. They could run even exotic portfolios by themselves if they wanted to – but they don’t have the time or the teams. Most of them are public servants. And they value the deep perspective into markets and the world that a large, sophisticated asset manager like GSAM can provide. Far from giving away the ‘secret sauce’, knowledge transfer is turning out to be a great way to retain the top-most clientele.
Another reason we gave GSAM this award was for its product development. Advice and knowledge transfer are important, but they’re not everything. What set GSAM’s product development apart was its desire to tailor ideas from scratch specifically for Asian clients, rather than bolt them onto something developed in the US. Examples include the Chinese equity products it has developed for mainland clients to control volatility or arbitrage the index; as well as solutions to help other investors play Asian fixed income.
JP Morgan Asset Management (Institutional Product/Strategy of the Year; and Asset Manager of the Year)
If you’re still with me, you will have noticed a few points in common. Product development is about being ahead of the curve, not chasing what’s already popular. It’s about creating solutions specifically for investors in Asia, not importing products from elsewhere. It’s about changing the conversation with clients, be they wholesale or institutional, away from selling and more toward advice. And it’s about having top-tier Asia investment capabilities.
JP Morgan AM has achieved all of these things, both in the retail and institutional space.
In the retail area, it has provided solid risk-adjusted returns in multiple asset classes, provided innovative products, been committed to client service and education, and ensured its management team was able to execute on all of the above – which isn’t easy for a firm of this size.
The firm showed its commitment, with actual money, to promote investor education post-crisis, without pushing product. Its pitch-free ‘investment academy’ has guided more than 20,000 people just in Hong Kong through the basics of investment.
The products that have succeeded have been those with an income element – another common theme this year – be they in equities, fixed income or multi-asset. So long as interest rates remain low, this will endure.
On the institutional side, the philosophy is about engaging top-tier clients in conversations about asset allocation and risk management. I hear this from many fund companies these days but for most it seems more of an aspiration than a reality. JP Morgan, however, has established strategic relationships with five leading Asian investors such as sovereign wealth funds.
The winner of the inaugural award for best institutional product neatly demonstrated all of the above. The JP Morgan AIRRO India Sidecar Fund was a specific Asia-developed response to European and US client requests for India exposure. The investors in question could fully tailor the deal and were – unusually – given full details of all the infrastructure projects that would be included, and a chance to speak to the sponsors in advance of committing.
In short, JP Morgan AM delivered beyond clients' expectations, and further boosted their comfort levels by putting its own capital into the deal.
Moreover, being the client’s adviser is more lucrative than responding to RFPs: the firm’s Asia revenues are up year-on-year by a massive margin (I’m not at liberty to disclose the figure). That’s because the fund house ends up working extremely closely with the client’s risk-management department. Such relationships can ride out short-term dips in performance; the cost of getting fired goes up for the client.
But to get there has required upgrading its people and a longer sales cycle. Client-facing people need the weight and experience to have frank discussions about all aspects of an institution’s portfolio, understand where the gaps are and be ready to admit that, sometimes, their company doesn't have a great product for a particular area.
Such honesty delivers the credibility to make a sale when the firm does have a strong capability, as JP Morgan has in, say, real estate. This is part of what it means to be transparent.
Few asset managers have the capability and the confidence to act this way. But in the post-crisis environment, as Asian institutions continue on their rise to prominence in global finance, it can make the difference between the success stories in asset management, and the also-rans.