Panellists discuss the geopolitical fractures concerning asset owners, Singapore as a hub for fintech start-ups and why it makes sense to raise capital from a Variable Capital Company (VCC). Chaired by Romil Patel in Singapore.
(head of Asia Pacific and Middle East – global client solutions, Aviva Investors)Mathew Kathayanat
(head of product and strategy – Asia-Pacific, BNY Mellon Asset Servicing)Anshuman Asthana
(regional head – securities services product management, transaction banking, Standard Chartered)Praveen Jagwani
(chief executive, UTI International)
Funds Global – Which regions, asset classes, sectors and themes currently present the most dynamic investment opportunities?
Scott Callander, Aviva Investors –
When you reflect on slowing economic growth and the challenges, both fiscally and politically, around the world, and then factor in the ongoing trade dispute between China and the US, there is a rather narrow universe of opportunities. Over the past two years, we have seen a plethora of fixed maturity products (FMP) launched, which are ostensibly trying to deliver on the global investor demand for yield.
The question many investors are asking is whether the slowdown in developed economies will spread to emerging markets, which are seeing better growth? Probably not. We see value in the debt market and to an extent equities too, and a very specific geographic play. This is one area we’re focused on.
We are also working to respond to the need for real income. Clients and customers from all walks of life have been facing the challenge where they’re getting healthy income streams from their solutions, but they’re drawing down capital to finance that. If we experience a large sell-off in markets, there is a risk of massive depreciation in the capital value of investments.
As a result, there is a need to move away from capital-funded income to naturally funded income, and overlaying that with environmental, social and governance (ESG) factors. That is becoming a powerful force in the region, which it wasn’t a year ago.
Anshuman Asthana, Standard Chartered –
The need for capital is huge and that has always been the case in this region – infrastructure development and infrastructure need in this region is acute. With affluence growing, all Asian countries are building bridges, subways, solar plants at a rapid pace and governments can fund only a part of it. Private funding, again, only a part of it – there are only a few big conglomerates in the region who are still willing to put up money. Where does the rest of the funding come from? From small investors channelled by international, regional and local funds, and that’s what the whole asset management industry is striving for and is contributing towards a better future. With trade tensions and lower incomes, there is a little bit of realism coming in of how much capital will be available, but the need for yield for investors plus the need for actual infrastructure still remains and hence Asia continues to be a great investment destination.
Mathew Kathayanat, BNY Mellon Asset Servicing –
In Asia-Pacific, large asset owners invest in the US and G7 economies, and they are sitting on negative-yielding instruments, cash balances which are not going anywhere. In the West, the large asset managers are all investing into China, India and Indonesia. China is the best-performing equity market so far in 2019, so obviously they have hedged their bets very well. It is tricky times, but asset managers are chasing yield and they seem to follow markets where they can maximise their bets. Asset owners don’t necessarily chase yields, they look at asset safety. Geopolitical fracturing is going to push some of these asset owners to look at other avenues to park their assets. We are increasingly seeing a shift to real estate, even longer horizons to hold their assets.
So essentially, they can sustain the volatility that would come in the interim?
Praveen Jagwani, UTI International –
Yes. A lot of our pension funds and insurance investors want to ride out the storm outside of the public market volatility and are therefore going into more illiquid and private markets. Thus, both private debt and private equity are gaining massive traction. Unfortunately, we are at a point in time where there is going to be a lot of blood on the streets. Our view is quite nervous for global growth, we are not talking about light at the end of the tunnel because we are entering the tunnel right now, which is scary if you don’t know how long it is.
The biggest signals for a bull market come from the bond markets, and when you have the entire yield curve of Sweden, Germany, Switzerland and Denmark, from overnight to 30 years negative, there is very little hope, and those signals are really strong. This year has been very good for pension fund managers across Scandinavia, New Zealand and Australia. They are happy because they’re sitting on about 7% to 8%, because yields have come off, they have had capital gains. But going forward, what do you do? When rates have been cut to negative, the possibility that the US Federal Reserve (Fed) could go negative is not yet unreal, but it’s a real risk and a lot of boards are evaluating. So, despite having a good year, what worries me the most is a consistent and overriding sense of pessimism that I find across all pension plans. They have had a great year – much better than 2018, yet there’s a fear because you don’t know where you’re going from here.
And possibly Asian pensions, to caveat it, liabilities are outpacing returns, they are not getting their client base contributing to their pension funds. Demographics are against them, and then they are faced with this challenge in terms of their yield.
Jyske Bank, the Danish bank, issued a ten-year covered bond at negative 50 basis points, oversubscribed twice. What would encourage people to pay 50 basis points for ten years?
The answer to that question is the expectation of a lower-for-longer interest rate environment. There is another aspect; you’ve got to step into the segments and understand how the asset allocators are buying it. Asset owners face a variety of challenges: Japanese pension funds, for example, need to generate a long-term return to meet its liabilities. In Europe there is rather more complexity because of the additional issues about capital treatment of different assets, and more critically, how to meet liabilities in essentially schemes that are in run-off. Their concern is they can’t allocate to traditional growth assets, which have contributed highly for ten or 11 years and may well continue to do so for the next one to two years. It’s not as though we’re going into the storm right now, but the economic signals are definitely suggesting a slowdown in developed market economies.
Does it spell the end of credit as an asset class? No. Does it spell the end of high yield? No. The issue is, however, that there has been indiscriminate buying of those asset classes, and so they’re looking increasingly for opportunities in private markets, such as real estate and infrastructure. Credit is being bought by passive funds: there is a real concern about how liquidity will be impacted when we see a downturn in the credit markets.
Clients don’t want to take the volatility, but they know they have to own the asset class, so how do you build portfolios or exposures across illiquid and liquid markets with sufficient protection for periods of sustained volatility and widening spreads? The answer is playing the long game with illiquid assets, and the long end of the curve in certain sectors of the corporate credit market. Then you also play the short end and balance your risks. Allocators are faced with that challenge.
The biggest risk for major allocators is redeployment of capital. What do I do with money coming in at this phase in the cycle? What do I do when I have maturing exposures bond in the market and new issues are offering such compressed yields?
What do I do if I have got an asset or a real estate fund that’s closing and I’m going to be repaid my capital and my allocation? Where do I deploy that money? That’s what’s putting the squeeze in; that’s why they’re casually deploying money into illiquid assets without really understanding that investment grade infrastructure debt in Europe is paying 1.6% to 1.8% in quality. It’s not a lot of money in real terms, but it’s an awful lot when you’re in negative rates and may remain there for a sustained period of time, so they’re banking on the asset accruing at the same time as spreads widening. The volume of money chasing a limited number of good opportunities is the concern.
For large allocators, funds or a large sovereign wealth fund, it’s difficult to identify a quick and a short growth avenue because they see markets from a distance. For the local asset managers who are operating at a country level, it is not that difficult. They do not have huge funds to manage, but they are on the ground, meaning they are able to identify opportunities quickly, some of which are short-term. So, it is not doom and gloom for an asset manager sitting, say, in Indonesia or in Vietnam. India is a little more mixed since some of the asset classes have become quite toxic, but pockets of growth are still anticipated. So, when we go out in the markets with the fund managers we are servicing, they are hopeful. Their hope has come down, but they are still hopeful of giving the growth that the investors have been asking for.
Your point is about thematics. What you have today is a need by asset managers to raise capital, and a need for private banks to distribute solutions to their clients to keep their offer live and valid and attributive to the individual’s wealth.
It’s not confined to Asia, it’s a global phenomenon. It’s pronounced in Asia, particularly in places like Taiwan and even Singapore to a certain extent. There has been a huge run of thematic solutions to market; we’ve had water, artificial intelligence (AI), robotics, fintech and global healthcare. The asset raises in Asia are relatively low versus what happens in a country like Japan where a robotics fund that went out last year raised US$5.5 billion in a couple of weeks. The problem, from the client’s perspective, is that they may only be investable themes for a relatively short period of time. It’s highly tactical, but as an industry we are not thinking strategically enough about the outcomes our clients need in five, ten or 15 years. How do we build sustainable volatility managed solutions to bring them out the other end with their wealth intact but not having had to endure the pain that a sovereign wealth fund actually can withstand? The differential in the mindset of the allocator is the key.
Funds Global – What are the major challenges facing you today?
As a service provider, as long as there are flows, it is relatively good for us, and to a large extent we anticipate some of those thematics to still continue in the next 12-18 months. Will the US-China issues have an impact? They will if the sentiment goes down – no one will invest in a frontier market if there is worry about the world order that impacts everyone. There is a little bit of worry everywhere and a lot of questions are being asked, especially: can you support it if there is a further problem? These look to be short-term ones, it’s not as if there is a long structural problem that exists which will last a lifetime.
The low interest rate environment and tail end of the economic cycle are never good times because they don’t engender sufficient optimism for the investment business. Even to make structured products, there needs to be a proper yield curve, hopefully upward-sloping, and none of those conditions exist right now in order to import a sense of optimism about the future. I personally think we are on the verge of some kind of accident waiting to happen. A couple of months ago, we just passed the threshold of more than 50% of trading on the S&P coming out of high-frequency trading (HFT). Such algorithmic trading can easily amplify the volatility leading to stock loss situations with asset managers and asset owners. You can have an accident now simply because of the volatility of the trading structure of the market. That’s unpredictable, it’s outside any of our controls.
Short-term, with negative interest rates, increasing leverage and the tail end of the economic cycle, it is quite a difficult phase for anyone to have a sense of excitement about the future. Wealth inequality and income inequality are becoming centre-stage for young unemployed people around the world. It’s an Arab Spring waiting to happen, and the longer interest rates remain low and jobs remain scarce, that will be a big challenge, because the ones who have the money are the old people across the world, they’re not spending. The ones who want to spend are the young ones, but they have neither the jobs nor the money. This paradox is going to show up in bizarre ways in our lives, which I think our industry is certainly not prepared for.
If you look at the current shape of the global economy, structurally there is deleveraging, a general slowdown to levels not seen probably since before 2012. Rates are down, and monetary policy tightened in the US and then weakened to essentially try and re-fire the economy. It’s not all doom and gloom, but we have seen a growth in social issues because of the shift in political leadership in many parts of the world. That is worrying.
It’s very difficult for the businesses to be strategic right now, given all the uncertainty that exists and the environment at almost every level.
Funds Global – What are your expectations for fintech start-ups and Singapore’s technology and innovation prospects as a result of the Variable Capital Company (VCC) structure?
Singapore is now one of the biggest hubs for fintech start-ups, and as these companies now come out of the labs on to the streets, they are looking to raise capital and get investments. Not all of them will succeed. Singapore has the wealth and private banks are sitting here, so the only thing that is missing is this wealth being transferred to a fund structure who then invest into some of these opportunities that are being built. A VCC structure at this time makes good sense for fintechs to raise capital from. Secondly, Singapore has an amazing pool of asset managers. Today, these asset managers raise capital from investors and private wealth in Singapore, set up a fund structure in Cayman or Luxembourg or Ireland and then bring it back to Asia for investment opportunities. The VCC provides the opportunity to do the whole ecosystem right here in Singapore. It is a fantastic opportunity.
It’s putting Singapore at an interesting geographical crossroads. Silicon Valley would be the comparison in the US, where there is this technological, digital crossroads. You’ve got the same thing in the UK in Cambridge and at the Silicon Roundabout in London, where everything comes together: transport links, tech links and talent. This is where I think Singapore has a huge advantage. Education is a huge industry – extra-curricular tuition generates about $15 billion a year.
That’s in addition to schooling costs, so it’s a huge industry that has produced fantastic talent. When the Monetary Authority of Singapore (MAS) and the government put money behind fintech events, they’re attracting really impressive global firms.
The VCC structure obviously is the final piece of the jigsaw to retain the entire value chain within Singapore. You have the administrators, the custodians, the banking, all the service providers here except for the Variable Capital structure. Last year we launched a private debt fund within the confines of the Singapore framework in a corporate structure. Very unwieldy – it’s really tough to manage. Every distribution you recall for necessitates a change of your capital structure, it’s not easy.
So, a Variable Capital structure within an umbrella set-up, each sell will replicate the segregated portfolio company (SPC) of Cayman; it’s a legally ring-fenced structure, you can have different assets in there, and to add another fund or sell probably takes a week, which is impossible anywhere else. This, I would imagine, is the final piece of the jigsaw puzzle to catapult Singapore into the pre-eminent financial centre space in which even Luxembourg and Ireland are not quite there. This is why Cayman exists, because if you want anything more bespoke than a Ucits fund, say a Euro Medium Term Note (EMTN) programme, you want to roll off transactions on tap, you can’t do that out of Ireland or Luxembourg. For that you go to the Caymans, British Virgin Islands or the Isle of Man, that’s where these things are incorporated.
We don’t have a concern with Ireland and structures in Ireland; they work effectively and they’ve been the winners for decades. We do have increasing visibility of clients who just don’t want to invest in structures via jurisdictions that can even remotely appear opaque. That’s where Singapore has a significant advantage, it has a mature regulatory environment; a community that’s set up to be able to put resources behind it and human talent into it, and I agree that it is going to become a strong centre for these types of vehicles. Is it going to be a global winner? Probably not immediately, but over time it will earn its stripes. Just as others will ebb and flow, Singapore will get to a state of optimised exposure and then ebb and flow along with everybody else.
Funds Global – Singapore has the highest number of high-net-worth (HNW) investors in Asia (43%) with a knowledge of sustainable investing and this figure is expected to rise. How do you see sustainable investing developing in Singapore over the next 12 months and what are some of the major milestones?
ESG has been central to our investment process over several decades. The perception that you get less return from your investments when ESG criteria are applied is finally disappearing. Investors, particularly the younger generation, have a social interest to do ESG investing, and it’s also becoming evident that implementing this doesn’t cost alpha. The complexity comes with the interpretation of what it means in practice: what is sustainable and what is ESG? How is each element defined? That changes across geographies – if you go to New Zealand, you’ll have a different understanding and impression of what it represents versus Singapore. So, there’s a bit of standardisation to be done there, but it’s a major trend and we have seen quite a number of launches across the industry.
Some countries are reacting very well – Thailand is a great example. Corporates there have been highly responsive in engaging with and being challenged by shareholders; people who have money invested in schools and a variety of other types of industries in Thailand. They are reacting really quickly to try and ensure they continue to enjoy the flow of foreign capital.
Every country is on a separate trajectory for ESG adoption. Despite being India’s largest money manager, we are not yet at the point of adopting activism on the boards. In the top-ten asset management companies of India, we were the only ones who are completely independent, so we are not a bank, an insurance company, a conglomerate – as a consequence, we have on occasion voted against the management. Obviously, it doesn’t make us very popular, but incorporating ESG in the investment process requires making bold decisions, and it’s not popular at all. It does come back and hurt you. The solution is not to greenwash and simply launch an ESG fund and a screener. In fact, some of the conversations we are having with institutional investors, they are looking for a year-on-year improvement in activism. How have you influenced that company to improve the E or S or G? They’re looking for measurement of impact.
We could easily just screen out everything. Currently we screen out munitions and a variety of other obvious factors. We’re not out of tobacco, we’re working with the industry to influence them to behave differently, but we’re not looking to completely veto them by screening them out, because what does that achieve? Our belief is that by real engagement with management, you can facilitate change over time and that has a social benefit. For example, we have worked extensively with big energy companies to push for change in their business models to be more socially and environmentally responsible. That’s not activism, that’s engagement, and it’s the interpretation.
Thailand is a great example where Securities and Exchange Commission and Stock Exchange of Thailand have set up processes, including tax benefits for funds to support sustainable projects, and local asset managers are there creating funds for sustainable infrastructure.
Funds Global – What is your outlook for Singapore as a fund management hub over the next 12 months?
It was in the late 1980s when the sovereign wealth funds in Singapore said that they will allow private fund managers to start using their money to invest, and that’s when the government decided to build an asset management industry here. In the last 30 years, there are now eight or nine big sovereign wealth funds sitting here managing funds. There is a massive asset management community here today. The way Singapore asset management has been built is a fabulous story, and step by step, piece by piece, regulators have been putting it all together to have a full ecosystem. I can only see a good outcome – I don’t see any big downside.
In terms of Hong Kong and Singapore, there is enough space for both. With the current conditions in Hong Kong, I think we should compare Hong Kong and Shanghai as the gateway into China. While Singapore has always kept its Asia and wider focus, Hong Kong, in the last few years had become more China-focused, at least for the funds industry. There is a good possibility that an onshore centre like Shanghai might be replacing Hong Kong rather than Singapore taking all the functions of Hong Kong.
Irrespective of what has happened this year, Hong Kong has its place. It’s home to the big international banks and it is a gateway to the north. If you reflect on the asset pools and where they lie in terms of addressable capital, southeast Asia is relatively small when you marry off Korea, Taiwan, China, Japan and the asset pools that sit in that space. You’ve got over 75% of the addressable market sitting in the north, so common sense might drag you to want to open in Hong Kong. It’s actually cheaper from a resource point of view to put people in Hong Kong now than Singapore. If you’re going to grow a business from scratch, you’re going to bring in non-local talent, but that’s a temporary environment, you hire in and you grow a local business, which is what we’re trying to do. We want to have a business that’s managed and run by Singaporeans as soon as possible, that’s the objective of growing a business here – to grow that talent. Hong Kong hasn’t gone, but it’s definitely not somewhere you can see people rushing to want to establish a new business today. It doesn’t necessarily tell you that they’re going to stop that conversation, they’ll just delay it.
Yes, and some of the scheme changes in QFII and RQFII announced recently makes some of the China-focused schemes in Hong Kong a little less attractive. So, investors can ask: ‘Why follow the route via Hong Kong when I can now get more of the similar services directly?’
China has got three major financial centres – Beijing, Shenzhen and Shanghai. What Hong Kong does have over the three other centres is a pool of English-speaking talent with experience in global asset management matters. The addressable market is massive, while for Singapore they will have to look westward and make a lot of overtures towards India, and that makes sense because that’s the next biggest pool of dollar millionaires, and the number of family offices being set up now in Singapore is massive. So, there is a lot of work and close cooperation happening between the Reserve Bank of India, the Securities and Exchange Board of India, the MAS and the finance ministry. In just the last five years, the way Singapore has overtaken Mauritius as the biggest conduit of Indian investments is remarkable.
Singapore today is the largest foreign investor into India, bigger than any other.
There is only room for a certain number of financial centres, and you’ve seen them popping up all over. To my mind, you have Hong Kong, Singapore, Dubai and then the conventional markets. Many people want to be in both of them; they both have mature regulatory environments, they both have business constructs that are well governed, they’re both relatively straightforward to establish, and from a tax point of view they’re well regarded by OECD. So, they’re running neck and neck, but one doesn’t have to beat the other, people can be in one, or both, or none. What it is doing is winning the game hands down when it comes to fintech, there’s no question that Singapore has absolutely laid its cards out on that, and it’s been a brilliant move.
Australia, Hong Kong and Singapore open-ended fund structures are first off the blocks – VCC for instance has been a while in the works, hopefully it’ll be up and running with the first batch of asset managers and that should set the state for the next 12 months. The next year is about getting these first fund launches set up and getting interest and seeing how it goes.
The engagement from the MAS has been absolutely incredible. I have never felt so wanted, desired, loved. This project has been outstanding.
Which type of products are best suited to VCCs?
Private markets and Reits, anything to do with multiple strategies. You just need one VCC structure as an umbrella, you get the best of EMTN and segregated portfolio companies. With the regulation behind that, they’re completely ring-fenced.
The MAS has realised that Hong Kong is positioned to look at China, there’s a massive gap to India as the next superpower, economic power, and therefore someone needs to capture that space – and they’re doing a great job.
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