AsianInvestor has set out to identify five key hurdles that asset managers need to overcome if they are to enter the winners’ enclosure at the end of Year of the Horse.
This is as much about positioning for future growth as it is about navigating near-term market challenges.
Over the past week or so have been revealing our selections in descending order of importance as we rate them. We chose cost control as our fifth-ranked choice, as reported; our number four pick was fundraising and at number three we chose passporting. We picked China liberalisation as number two
And in our top spot for Year of the Horse we have selected fixed income. Transitioning portfolios through tapering by the US Federal Reserve can set the stage for success, so whoever manages this best will be well placed.
The question for fund firms is: will the huge bond fund sales of recent years become redemptions? And will money flow into equity funds instead?
The answer is that fund houses will need to become great duration managers to protect against a rising interest rate environment. It will make active management relevant in the fixed income arena this year. Those who get their securities selection right and hedge their duration will emerge as the winners.
We sought the views of a wide range of industry professionals including asset management CEOs, portfolio managers, institutional and retail salespeople, distributors, custodians, lawyers, consultants, recruiters and research analysts.
Thank you for your input and we welcome your feedback.
1. Fixed income
There’s a perception that equity markets will offer better risk-return rewards than fixed income in the year ahead. This reflects expectations that the Federal Reserve will continue to taper its bond-buying programme and that 10-year US rates will edge upwards to 3.5% by year-end.
If this plays out, will the big bond fund sales of recent years turn into redemptions, and will the money head into equity funds? “Just because there’s a perception that fixed income is not a good place to be in a rising rate environment, it does not mean that returns cannot be made from the broad asset class,” says Roger Bacon, head of managed investments for Asia Pacific at Citi Private Bank.
The thinking is that whichever fund houses best manage the transition of their portfolios through tapering will emerge as the winners in 2014. Securities selection will be key, both from an allocation perspective and to win mandates from the region’s asset owners. The cumulative impact of three years of near-zero short-term rates is forcing even conservative institutions to take calculated risks.
So fund houses must become great duration managers to hedge against a rising rate environment, although shorter durations won’t provide enough yield on their own. Fund houses will need access to a range of securities including mortgages, sovereigns, corporate credit in US dollars and local currency and greater regional diversification, enabling them to build better fixed income products.
Credit spreads have widened and that could be the area where they see value. Firms will likely need to take a more active view on bonds, an approach unconstrained by benchmark guidance (although there’s little appetite for this in Asia). That could lead to questions over the resourcing of fixed income teams.
On the retail side Asian nations have ageing populations and there will be increased demand for income products. So in fact asset managers might find fixed income a big growth area in 2014. Getting this right will have a multi-year impact on a fund manager’s business. Of course, there’s no guarantee that US long-bond rates will continue to rise. And if the Fed doesn’t taper and rates decline, another wall of money could career towards Asia.