Senior figures see bright future for active houses

There is potential upside in equities, while the rise in passive investing is creating a bigger elephant for active managers to shoot at, say Bill Maldonado of HSBC and Oliver Bolitho of Goldman.
Senior figures see bright future for active houses

The future is looking a lot brighter for active managers, given potential upside in the equity market and increased opportunity to target inefficiencies amid a global rise in passive investing.

Speaking yesterday in a panel discussion at AsianInvestor’s conference The Art of Asset Management, Bill Maldonado, Asia-Pacific CIO of HSBC Global Asset Management, voiced his expectation that the next two years could be very positive for the equities market.

He noted it was “mathematically almost impossible” for fixed income to generate the sort of returns in 2013 that it did in 2012, with contraction in yields on risk-free assets and bond spreads even as equity valuations have become compelling and earnings remain decent.

“I think equities will do very well in the next couple of years,” he forecast, adding that another supporting factor was the fact that no one is really expecting this upside.

“I don’t think anyone in this room is dusting off their equity products. Everyone is assuming that the rollercoaster is going to continue on fixed income, so I think there is a lot of potential upside.”

Oliver Bolitho (pictured), Asia-Pacific head of Goldman Sachs Asset Management, agreed, and challenged the room to think through scenarios such as inflation (short-term shock to equities, major shock to bonds), saying managers will be challenged to come up with appropriate products.

The panel had just been discussing the post-crisis trend of multi-asset income funds, one which shows no signs of abating. And Bolitho pointed to private equity firms such as Blackstone and KKR as future competitors to asset managers both in the retail and institutional arenas.

“They are looking at bringing multi-asset alternative products to the table, which would blend private equity, hedge funds, real estate, maybe infrastructure and some mezzanine debt,” he said. “They are specialists in all of those, and that might make a very attractive product.”

He indicated that if the world fell into a Japan-like scenario where interest rates just grind down, managers would be forced to look at the relative yield of equities or other asset classes, including real estate.

On the issue of multi-asset allocation, Maldonado described it as a very important trend and the beginnings of what will be “a very significant business” for HSBC Global Asset Management. He noted the firm had been bulking up, although it had found finding fixed income talent a challenge.

Bolitho pointed out the happy coincidence that the rise of investor interest in Asian fixed income coupons had come at the same time as the opening up of the region's debt capital markets.

“It is probably a very long-term trend that we will have corporates in this region issuing debt to restructure their balance sheets in a more efficient way,” he said, indicating Asian debt was a natural product as Asia’s aging population seeks insurance and pension security.

Yet at the same time he acknowledged that market limitations meant most Asian investors were still accessing western bond markets, and he warned: “Are we starting to buy marginal paper in the credit markets? Investors need to be careful on what they put into their portfolios.”

The question of how the income element of multi-asset funds was paid out (whether managers were selling capital positions to pay the yield) was raised.

The third panellist Trevor Lee, director of investment products at the Securities and Futures Commission (SFC), noted that the regulator had been working with the Hong Kong Investment Funds Association on potential disclosure issues.

“Surprisingly it was one of the topics that has come up in my discussions with distributors,” he said. “They are concerned about this, and they have been seeking clarification from managers.”

But Bolitho took a different tack, noting that some investors were happy with so-called double-decker products where capital is eaten away provided the income stream remains the same. “There is a rationale for products like that provided the relationship between the underlying asset and people’s return expectations is there,” he said.

Speaking about Japan specifically, he added: “I would not walk away from these products, because if [former prime minister Shinzo] Abe gets elected in early December and pursues this policy of depreciating the yen, we will all be building double-deckers again.”

Importantly, Lee also noted a rise in funds being registered with the SFC by locally based managers. “With initiatives coming from China, we see locally based managers including from the mainland doing more product, working on such things as equity linked.”

He said the rise of RMB products was still dependent on such things as quota, but he said that given the recent increase in RQFII quota, this could be extended to cover Hong Kong managers and even international managers in future.

Meanwhile both Maldonado and Bolitho saw room for optimism in the face of the rise of passive investing globally. “I think the pendulum has swung significantly away from passive in this environment because the dislocations we have seen in the last 12-24 months have created significant opportunities for equity managers,” said Maldonado.

Bolitho added: “It tees up the future success of active managers. The bigger the passive market gets, the fewer people there are playing in the pools of inefficiency and that is where the active managers can go. The more passive it gets, the bigger the elephant you are shooting at.”

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