The flight to emerging markets -- and particularly Asia -- of much of the world's capital has been well documented, and has been even more acute among domestic investors in the region.
There are of course good reasons for this -- stronger fundamentals, better growth prospects, uncertainty in Western (and particularly European) markets, among other things. But simply piling into regional markets without acknowledging the often huge differences between them is not necessarily the best approach.
However, both institutional and high-net-worth investors appear to be categorising their investments in Asia with increasing granularity, says Michael Syn, chief operating officer at DBS Asset Management (DBS AM) in Singapore. Investment consultants have seen a big pick-up in searches for, say, Asia ex-Japan or Asean portfolios in the past three to six months, he says, as opposed to treating Asia or 'emerging markets' as a block.
The poorer-quality debt and relative reduction in capital-market sizes in the West will naturally lead to a larger Asian weighting on cap-weighted and quality-weighted bases, says Syn. This has already led to calls by many in the market for both equity and fixed-income indices to have a much bigger weighting for the region, and the emergence of benchmarks for that purpose, from asset managers including Lombard Odier and Pimco.
In addition, the crisis has meant retail and high-net-worth investors in Asia now have an even greater home bias than they did before. "So Asia is buying more Asia and less of the rest of the world," he says.
Meanwhile, there has been a growing trend among larger Asian institutional investors to expand their allocations to global or regional -- that is, non-domestic -- assets, says Syn. Institutions such as large state agencies recognise they need to diversify their portfolios, particularly if they are to achieve higher returns.
In Malaysia, for example, state investment agencies have openly acknowledged the need to increase foreign-asset exposure. That's because growth in the domestic economy is likely to be significantly slower in the coming years than pre-crisis, and local markets are simply not big and liquid enough to comfortably accommodate investments from entities such as Bank Negara Malaysia and the Employees Pension Fund.
DBS AM is well placed to benefit from this trend, says Syn, citing its overseas focus in recent years on China and Malaysia. The firm has a long-standing partnership in Malaysia in the form of HwangDBS Investment Management, and in China with 'old 10' firm Changsheng Fund Management.
"Most of our accredited clients in those markets are able to buy and/or manage funds offshore," says Syn, but there is an inherent tension between wandering further away from the asset origin, and expecting ever closer access to the fund manager.
One solution that would aid fund distribution is a regional passporting scheme. "Passporting has not really happened in a meaningful way yet," says Syn, "but as we move in that direction, Asian regional asset managers such as ourselves will benefit significantly from greater passporting."
He is referring to the concept of a regulatory standard for funds that means, for instance, that compliant funds issued in, say, Hong Kong could be sold in Malaysia without further needing to comply with Malaysian regulations -- rather like the Ucits scheme in Europe. Australia has proposed that this kind of approach be developed for the Asia-Pacific region.
Syn says the "logical next step" for DBS AM's strategy would be to shadow the recent expansion in the DBS banking network, which has been opening more branches across the region, particularly in China, India and Taiwan.
"[DBS Group chief executive] Piyush [Gupta] has clearly indicated an ambition to grow significantly in the region, with a 40:30:30 revenue mix between Singapore, Greater China, South and Southeast Asia," adds Syn. "It makes sense for us to complement DBS's regional ambitions by being the long-term product provider of choice for the network."