There has been a trend in the past year for large institutional investors in many places to reconsider the traditional home bias in their equity portfolios. And this trend is accelerating,
"One big trend globally has been pension funds questioning whether they should have a home bias in their investments," he tells AsianInvestor during a visit to Hong Kong last week. "Accounting standards are now similar across countries, brokers can trade across most markets, analysts cover almost every country; the whole eco-system means it's easier to invest overseas now."
What's more, the financial crisis has shown that there's a high correlation between markets, which is another reason to question the use of home bias, says Niggli. These higher correlations have been observed across regions and investment styles.
Not all pension plans in the world are invested in emerging markets, he adds, so the average allocation is probably around 3-4%, less than the current 10-15% global market cap weight. Niggli says he expects to see more money being managed through indices such as the MSCI AC Asia-Pacific, and this will see a trickle-down to locally based firms.
"The questioning of domestic bias is happening in many places," he says. "But whether it will take two years, 10 years or 15 years to trickle down, I don't know." For example, if a US-based institutional investor were to have a bias of around 60% domestic stocks to 40% non-US, but the market cap weight of the US is closer to 50%, then that is something that may change, says Niggli.
Of course, the trend depends on the market. Some markets -- such as China -- have done relatively well, so Chinese investors may be less inclined to invest in foreign assets, says Niggli. But others -- like Japan -- have not performed so well relative to other markets, so there appears to be more interest among Japanese investors in overseas markets. Such investors are asking MSCI Barra for tools to study the benefits of investing abroad.
In turn, many countries are increasingly relaxing rules on overseas investments -- Niggli cites China's QDII scheme as one example. But not so long ago, even developed markets, such as Japan or Switzerland, did not let pension funds invest overseas without some restrictions, he says.
A large part of MSCI Barra's business is to provide support to its core clients -- large institutional investors, such as sovereign wealth funds and national pension schemes -- on asset allocation, both geographic and sectoral. "One of our areas of particular strength is to provide research to institutions on overseas allocations," says Niggli. "This includes, for example, information for US investors that may shape their Asian, Japanese and European allocations."
One reason for Niggli's trip to Hong Kong is to focus on China, and especially the qualified domestic institutional investor (QDII) scheme, which enables local Chinese investors to buy global funds. MSCI Barra has nearly 50 institutional clients in mainland China, including the country's Social Security Fund.
MSCI Barra is hoping that exchange-traded funds (ETFs) referencing foreign assets will soon be given QDII quotas. "Current ETFs in China are all on A-shares, but there is talk of creating locally listed ETFs on global products," says Niggli. "We wanted to check in on the status in this area -- we're obviously very excited about the opportunity."
"We don't know when it will happen, but there's definitely momentum; asset managers are creating plans and the CSRC [China Securities Regulatory Commission] is studying proposals," he adds. "There's genuine interest in doing it, but all parties want to make sure the execution is right."
ETFs are a significant part of MSCI Barra's business. Around $200 billion of the estimated $1 trillion in global ETF assets follow MSCI indices -- about one-third in terms of global equity ETF assets or 75% of non-domestic ETFs. Moreover, in China, eight of the 10 QDII fund managers use MSCI indices.
Asia as a whole accounts for roughly 15% of MSCI Barra's revenues, and Niggli visits the region two or three times a year. The company has roughly 250 people across Hong Kong, Tokyo, Mumbai, Shanghai and Sydney, and continues to evaluate potential new venues for offices -- for example, South Korea is "on our list", he says.