Invesco chairman frets over Hong Kong

In a wide-ranging interview, Michael Benson looks at opportunities and risks in Asia.

Michael Benson, vice-chairman of Amvescap and chairman of Invesco in London, has expressed his concern about the future of Hong Kong and Asia as centres of growth. He spoke with FinanceAsia during a trip to Hong Kong and immediately brought up the subject of last week's anti-government march that attracted nearly 500,000 people.

Benson: I was asked to give a talk about the future of Hong Kong recently, and I outlined what is of paramount importance here: the respect for law, the integrity of the financial system and the integrity of government. One just begins to wonder if the events of the past few months have begun eating away at the transparency and integrity of the government. I've said to myself, "I can't believe this is happening." I've talked to people here and there's an absolute condemnation but the government's not doing anything about it. There doesn't seem to be accountability.

But Hong Kong has so much potential, it can really be good for the development of China. Someone suggested they should take Kai Tak [the old airport] and use it to build the biggest medical centre in Asia - make Hong Kong and southern China the region's centre of medical research.

The march wasn't really about Article 23, but about the direction of the government. If Hong Kong doesn't grasp the opportunity with vision and direction, then in five, 10 years time, where will Hong Kong be?

FA: Invesco's put a lot of resources into building its name here. Do these concerns impact your plans?

It doesn't make me think we won't continue to be a vibrant force in Hong Kong. Despite the seeming lack of government leadership, Hong Kong can get through by its sheer energy and determination. I haven't met a single person who's supportive of the government, but all of them have said, "We'll get through this." I came out here 10 years ago to start Invesco's effort in the region. Now we've had success, we've got a damn good team, we've got a new joint venture in Shenzhen. We're staying.

Over time, through our JV or our own devices, we'll have a representative in Beijing or Shanghai, because one just can't service all of China from Hong Kong. We're lucky. We've got a great JV partner in Great Wall. It pleases me to see how well all the senior executives get on. We've been thinking about China for five or six years, and I and chairman Charlie Brady have held the view that China is a place we have to get into, a place where we must offer services to institutions and individuals, as the rules allow.

I slightly get the feeling in Hong Kong today that there's almost a fear of China. People here see it as a tremendous economic force. And as Hong Kong has yet to find its identity, it's unsure about this. Which takes me back to my point about the Hong Kong government; where's its five-year plan? It's not just Sars or Article 23; there's fundamentally something amiss at the moment.

How does that impact a service provider such as Invesco, though?

We have a clear China strategy, which is in Shenzhen, Hong Kong and Taiwan. We'd wait to see how it all panned out. I can't see us not using Hong Kong as an important hub for the rest of our business. After all, the great Hongkong Bank and Standard Chartered and Citibank aren't going to pull out of Hong Kong. But how we deal with other parts of the business, I don't know. I want Hong Kong to be hugely successful.

What's the status of the JV?

It's all set to go. It's up and running. We have the necessary permissions, and we have 26 people in Shenzhen now. What's imminent is the final permission to launch our first fund, and we expect to get it any day now. We hope to launch by August.

And Taiwan?

What we see in Taiwan is the rules and regulations surrounding institutional fund management are breaking down. The regulators are making it easier for foreign-owned companies to manage institutional money. I think Taiwan should be hugely important. Two years ago we took over Grand Pacific's business and that's been a success. Our assets have grown and we've gained a few mandates on the institutional side.

How does Asia fit into your business globally?

Maybe I'm biased because I started with Invesco on 1 January 1994 here in Hong Kong, when we were a tiny operation losing money. Asia has been a great success. And in a way it's been a disappointment. It was all very agreeable during the boom when the Asian tigers were stalking the jungle. Since then it's been very tough going. But we have a well-established brand name and I'm proud of that. Since 1998 there has been a massive destruction of individual and corporate wealth in Asia, but it's still a very attractive area.

Japan undoubtedly has been a disappointment because the economy there has been so tough, and it's difficult to see how in the short term that will change substantially. The past six months we've seen a rally, but will the culture change to pull Japan out of the recession it's found itself in? Despite all the good intentions, the changes necessary to move Japan closer to Western economies haven't worked - they haven't really implemented fundamental changes. It's hard because of the huge cultural situation.

They are, however, the second biggest economy in the world, and we have no intention to pull out. We'll be able to sell more products to banks and insurance companies as things slowly change. We've seen greater willingness by institutions to embrace foreign products. We've got a steady stream of people from New York engaging our Japanese clients.

What trends worry you?

Worry is the wrong word, but I muse about how the fact of China's becoming economically powerful affects Japan and the way it works. In five years, provided there are no upsets, we may say China's economy is as big, or almost the same size, and one wonders how that plays out.

Asia as a whole is seeing a shift in manufacturing capability to China. I've read that China could take as many as 50 million jobs out of the rest of the world over the next five years. We have to watch the effect this has on Asia and Japan.

How does that impact a firm such as Invesco?

This must be economically bad for the tigers. I suppose unless they change their economic models in the way Singapore is doing, the destruction of wealth we saw during the financial crisis will continue. The man in the street will be a poorer person, and that would affect where we go to sell our products.

Surely China's rise is not a zero-sum game for Asia?

No. But will the governments of smaller economies be able to adapt sufficiently quickly to changing economies? That's the issue. And you need people to have money to spend. You can come to terms with China, but not without some pain, and there will be winners and losers.

What about China itself?

The concern about China is the widening gap between the rich and the poor, which we know from history creates social tension. If it ever blew up it would set things back. But looking at the way China recently changed its leadership, one does have confidence in the competency of the government. But you can get carried away and believe everything's going fine.

A lot of foreigners are seduced by Shanghai but it can be a Potemkin's village.

You're exactly right. There's no doubt this wealth has to be extended west into the mainland. We get an over-glossy view because of the places we go and the people we meet. I want to spend time in the less glamorous places of China.

What about India?

We did look at India seven years ago. It's not an easy market, it's very bureaucratic. But it has a growing middle class. It's now easier to sell mutual funds there. We nearly did a JV there about six years ago and I'm glad we didn't. But if you look out five or 10 years, there may be an opportunity. But we need a relaxation of India's exchange controls. It's not the right time for us.

You say you're glad you didn't do the JV there. With hindsight, should you have made your investment in Japan?

Yes. Although it's difficult to do business there, it's a huge economy, one that is much more disciplined than India, and more open. And the past 10 years the government has let us manage big pension money. An Indian JV would require you to rely on a partner to do distribution and you'd be managing Indian money. We'd go in there if they relaxed the exchange controls so that money could flow into our international products.

And what about Korea.

We haven't got anything in Korea and we don't intend to have anything in Korea. People say it's a very dynamic market but I've never found anything particularly dynamic in Seoul. And I have to say there's always the problem of the North. Having been to the North myself, I'm not so worried about their ability to deliver a nuclear bomb, however.

Can you expand a bit on that? It's a big asset management market.

Yes it is. But it's a difficult place to do business. We've tried to sell funds there or do JVs but it just hasn't worked. And I'm not sure why.

Globally where's your brightest opportunity?

Asian assets, including from Japan, are not a large part of our total business. But it's the belief of our board that Europe and Asia - including China - should offer opportunities for us to grow. America is a mature market. Europe has been a savings-oriented market, a bank market. It should be a huge opportunity for an organization like ours. But the cult of equity came there in the 1990s, followed by a three-year bear market. It's shaken the confidence of investors.

But it hasn't invalidated the strategy that Europe offers a lot to the investment management industry. Western European governments have made up their mind. They can't support an aging population. There's a savings revolution as people are realizing that if they want to retire in dignity, more investments will have to go into equities. The fund management industry today is under something of a cloud, people perceive, rightly or wrongly, that the industry hasn't done them a service. But flows into the market have begun again.

How do you compete?

There is only one thing which matters: good, consistent investment performance, backed up by good, above-average service. If you can get that right, you'll always be at the top of the pops. My benchmark is how we're doing against the peer group. It's very simple: you buy shares when they're going up and you sell shares when they're going down, and you leave the last 10% for the other guy. We don't try to trade at the peaks.

And we've got to be absolutely transparent. You can be transparent and charge reasonable fees. What pisses people off is not higher fees but feeling they don't understand what they're being charged.