Rediscovering diversification amid global turbulence

Distributors are taking a harder look at investment products that offer broad diversification, or so says AllianceBernstein, which hopes to find an opening for target-return retirement products for AsiaÆs growing retail market.
Consumer and private banks in Asia are taking a harder look at investment products that offer broad diversification rather than chase a hot theme, says Ranji Nagaswami, New York-based chief investment officer at AllianceBernstein.

On a recent tour through Asia and Japan, she says the firm is getting interest in its global balanced funds, in many cases for the first time, as distributors look to find products to weather current market volatility.

AllianceBernstein would like to spark interest in Asia for target-dated funds. These are funds aimed at the retail market, particularly less savvy customers new to investment, that ask people to name a maturity date û the year they retire, or the year they want to send a child to university, and so on. The fund automatically rebalances toward gradually more conservative, bond-heavy exposures the nearer the year.

These products are massive sellers in America but have yet to penetrate Asia, although they are getting airplay here û for example, both Watson Wyatt consultant Philip Tso and Bank Consortium Trust CEO Lau Ka-shi advocated their use for Hong KongÆs Mandatory Provident Fund scheme at separate seminars last week.

The first use of these in the region is in Japan, where Japan Post has mandated Nomura Asset Management for target-date funds. Advisors to TaiwanÆs government are also looking to introduce these for its new, state-run corporate pensions system.

Nagaswami is in regular discussions with distributors worldwide. Officials at banks in Asia have similar questions, trying to understand when the US economic slowdown will end and when financial institutions will stop writing down losses to subprime credit exposure.

ôBut for the first time theyÆre not asking us why we donÆt have a hot Vietnam fund,ö she says.

Distributors û and their manufacturers û face the problem of customer expectations, which have grown used to spectacular returns on emerging-market equities over the past five years, and are now rushing into commodity or resource-themed funds. ôItÆs an exact replay of the tech bubble,ö Nagaswami says, despite the sound fundamentals of emerging-market economies.

ôPerformance in the past five years wonÆt presage the next five years,ö she says. ôCycles end as furiously as they began.ö

Investors are likely to suffer if they donÆt diversify out of emerging-market stocks, she says, noting they are heavily underweight US equities and particularly the financial sector; and also the dollar, which is now cheap in purchasing-power-parity terms. ôWorld-class companies in this sector offer the best chance for an upside surprise in the next five years.ö She adds when markets bounce back, the first jump is usually the biggest, so only those with existing exposures gain.

The biggest difference between distributors in Asia and the US is that many in Asia report their clients have moved to cash in the hope of catching the market turn û which they inevitably will fail to do unless theyÆre broadly invested. Nagaswami puts this down to inexperience, noting that most retail investors in Asia today have only been in the market for two or three years and have never experienced a bear market.

ôIn the US people still remember the 2000-2002 bear market,ö she says. Therefore more people are switching to balanced funds instead of going to cash. ôItÆs true that equity valuations are cheap now, but so is anything with spread.ö

Her final argument is that investors chasing country themes û Brics, Vietnam, etc û are being misled, because such choices are almost irrelevant. This insistence on country picks is universal, and perhaps reflects habits: in the 1980s, country calls made a big difference. But globalisation means sector and company selection is now far more important: in developed markets it accounts for 90% of performance, and the lionÆs share in emerging markets as well. ôThis is a change, but the answer now is to invest globally,ö she says.
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