Barbell theory

Hong Kong skyscrapersInvestors in Asia are finding a middle way between high-risk trades on the one hand and low-risk bank deposits on the other, says Malik Sarwar of HSBC. He talks to George Mitton. During a financial conference in Hong Kong recently, Malik Sarwar raised laughs from a crowded hotel ballroom. On stage was a panel of British and American economists who had presented a pessimistic view of Asia’s economic future. China’s growth was unsustainable, said the panel. Across Asia, they added, ageing populations were creating systemic problems that would be hard to solve. The outlook, they said, was uncertain. “Do you think,” said Sarwar, “that the panel is presenting a gweilo view?” It was the Cantonese colloquialism gweilo, meaning a foreigner, that delighted the audience, many of whom were Chinese. But Sarwar had a serious point too. Is it possible that outsiders, based in London, New York or elsewhere, are failing to develop an accurate view of what is happening in Asia? RETAIL BIAS
One of the persistent confusions that US or Europe-based asset managers have when accessing Asia concerns the needs of Asian retail clients. This is an area Sarwar understands well in his role at HSBC’s retail banking and wealth management division, a part of the company that deals with a client set sometimes referred to as ‘mass affluent’. These are people with enough savings to require services above and beyond a simple current account and debit card, but with less than the millions needed for them to be served by the company’s private bank. As advisers to these clients, Sarwar’s team plays a crucial role in the asset management sector by acting as a funnel by which client money is channelled into mutual funds. HSBC’s practice is to give its clients a shortlist of funds, picking three or four per asset class, from which clients make their own choices. HSBC and other advisers like it have a lot of power. Their decisions as to which funds make the shortlist, and which don’t, determine who gets inflows and who is ignored. Sarwar’s role gives him an interesting perspective on a question regarding these mass affluent Asian investors. Given that many Asian investors are said to be prudent savers, why is fund churn so high? Why, in other words, do these savers behave so much like gamblers? The answer, he says, is in the shape of a barbell. IN BETWEEN
Imagine a weightlifter loading up one end of the bar with metal plates representing bank deposits. These still account for the majority of individual savings in Asia. Bank deposits are about the lowest-risk investment anyone can make, with an accompanying low yield that may not beat inflation. On the other end of the bar is what Sarwar calls “play money”. This is cash that an individual can afford to lose, but which they would like to yield a big return. It is this play money, he says, that goes in and out of Asian mutual funds at such speed. It is arguably the same speculative money that has caused big swings in the Chinese stock market in the past year or two, and which seeks out leveraged fund structures and other high-risk investment options. There is nothing specifically Asian about this dichotomy between, on the one hand, very low-risk investments and, on the other, high-risk ones. Indeed, Sarwar asserts that if you go back several decades in the US, you would see the same barbell shape. What has changed in developed markets? The growth of a “healthy middle”. In the US in the past several decades, money has migrated from bank deposits to the space in the middle of the bar, where it is invested in long-term, medium-risk mutual funds.  The US can count the development of the 401k retirement savings scheme as the catalyst to developing a large “healthy middle”.  In Asia, says Sarwar, the desire for private pensions and an increasing reliance on financial advisers is causing the same trend. It’s in this “healthy middle” that asset managers in Asia can expect to make their steady, long-term profits. ROLLING THE DICE
Sarwar’s views run counter to a common stereotype, which gains some plausibility from the high turnover of funds in this region, that Asian investors are natural gamblers. He agrees that, historically, Asian investors have been speculative fund buyers, but denies that this is a specifically Asian phenomenon.  “There’s gambling all over the world, from Las Vegas to Monte Carlo. That’s play money. You don’t put the kids’ education money there.” The reference to education is important, because Sarwar says the most common investment goal he sees among clients is from parents who want to fund university fees for their children.  This goal is difficult to reach. University fees are high and, maddeningly, they are rising faster than inflation in some countries.  In the US, fees are rising about 5% a year, according to HSBC research. The example shows, he says, the importance of financial advice. It takes a lot of planning to save the right sum to fund a child’s education. And if an investor only puts money in the bank, the amount they will have to pay in may be higher than if they opt for a balanced portfolio of funds.  Sarwar says that, with coaching and guidance, Asian clients are willing to take more risks with their money. They are changing the shape of the barbell. BACKGROUND
Sarwar’s own background has informed his view of the essential similarities between Asian and American investors.  Born in Pakistan, he worked for Merrill Lynch in New York, Tokyo and Bahrain, before moving on to work for Citi in Sacingapore and then New York again. He has worked for HSBC in Hong Kong since 2011.  Throughout his career, he has advised wealthy clients on how to invest their money to meet their investment goals. The experience has taught him a key principle that is relevant for anyone trying to determine their financial future.  “People don’t plan to fail,” he says, “they fail to plan.” ©2016 funds global asia

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