the rise of asian capital markets · 2009-06-21 · real estate funds pension funds endowments fund...

The Rise of Asian Capital MarketsJC de Swaan

Renmin UniversityJune 23rd, 2009

AGENDA

Overview of the “Buy-Side”

Mutual Funds

Sovereign Wealth Funds

Hedge Funds

Prospects for the Asset Management Industry

Investment Frameworks

1


2

Mutual funds

Institutional long-only

Private equity

Hedge funds

Commodities funds

Real estate funds

Pension funds

Endowments

Fund of funds

Insurance assets

Sovereign wealth funds

ETFs

Private banking

NOT COMPREHENSIVE

Indirect Investors* Direct Investors

* Many indirect investors also make direct investments in addition to investing in other funds.** Some traditional long only vehicles are now able to re-create alternative investment strategies, including long-

short.

Traditional “long-only” vehicles seeking beta**

Alternative investment vehicles seeking alpha

Source of Investment Returns

3

Alpha

• Excess investment return over the security’s expected return from systematic market exposure

• Investment returns generated by unique investment skill of fund manager

• Also referred to as the unexplained portion of investment returns

Beta

• Investment returns “generated” by markets, ie correlated to market returns

• A positive beta reflects positive correlation with market

• A negative beta reflects inverse correlation with market

• A beta of 0 reflects no correlation

Definition

Break-Down of Assets Under Management

Private Equity

Hedge Funds

SovereignWealth Funds

InsuranceAssets

Mutual Funds

Pension Funds

2007$ Trillion

Note: AUMs are not comprehensive. There is small overlap between categories (eg SWFs investing in hedge funds. PE includes leveraged buy-out funds only.

Source: McKinsey Global Institute, Morgan Stanley

28.1

26.2

5.0

1.9

0.9

19.0

5.0

With leverage

4

2.9High end of estimates

NOT COMPREHENSIVE

Growth of Professionally-Managed Assets

Note: Professionally-managed assets defined as those for which a management fee is paid. This excludes insurance assets, pension funds, corporations, governments, not-for-profits, and banks. Total managed assets would have been $52 trillion in 2002.

Source: BCG5

2831

37

43

4952

59

2001 2002 2003 2004 2005 2006 2007

2001-2007$ Trillion

CAGR = 13%

Geographical Break-Down of Assets

34.0%

11.0%

4.0%

4.0%

47.0%

Professionally-Managed Assets

Source: BCG

USA

2007 Total = $58.9 Trillion

Europe

Other

6

Other Americas

Asia-Pacific

11.0%8.0%

7.0%

7.0%

7.0%

19.0%

41.0%

500 Top Global Managers

USA


UK

Other

Switzerland

Germany

France

Japan

Source: IFSL

Asset Management Versus Hedge Funds

7

Hedge Funds

• Fund of Hedge Funds (46%)

• High net worth individuals (32%)

• Pension funds (10%)

• Institutions (6%)• Endowments (5%)

Asset Management/ Mutual Funds

• Retail• Institutional

Investor Base Benchmark

• In theory, no benchmark

• Focus on absolute returns and delivery of positive Alpha

• Relevant market index

• Focus on relative performance and delivery of Beta

Regulation

• Loosely regulated• Voluntary SEC

registration in the US

• Though strong international momentum to increase regulation following financial crisis and Madoffscandal

• Highly regulated• Strict mandates• Strict reporting

rules

Source: McKinsey Global Institute

Fee structure

• Annual fee based on AUM

• Incentive fee based on profits

• Typical “2 and 20” structure revised down following poor 2008 performance

• “Load”• Annual fee

based on AUM

AGENDA


Mutual Funds


Hedge Funds



8

Overview of Mutual Funds

9

Sector funds

Cap-focused funds

Growth funds

Regional funds

Value funds

Growth funds

Domestic funds

Balanced funds

Alternative funds

International equity funds

Municipal bond funds

Value funds

Fixed income funds

Morningstar Categories

Country funds

Metals

Long-short

Currency

Source: Morningstar

Mutual Fund Returns

12.3%

7.3%

S&P 500 Mutual Fund Industry

Average Returns1980-2005

Note: Mutual fund returns net of feesSource: John Bogle

10

Growth of Mutual Fund Versus ETF AUMs

Assets Under ManagementIn $ Billions

Source: ICI Factbook, iShares 11

11,655 11,324

14,048

16,16517,771

21,808

26,130

18,975

105 142 212 310 412 566 797 711

2001 2002 2003 2004 2005 2006 2007 2008

Mutual Funds

ETFs

CAGR

7.2%

31.5%

AGENDA


Mutual Funds


Hedge Funds



12

Overview of Sovereign Wealth Funds

Long-term investment horizons

• Typically long-term investment horizons given high stickiness of their capital base

• Recent trend toward seeking greater risk/reward opportunities• Typically not leveraged

Government investment vehicles

• Surplus national savings managed separately from official reserves kept by monetary authorities

• Typically built up from years of current account surpluses from oil exports for Middle-Eastern countries and manufacturing exports for Asian countries

Description

Controversial• Seen by some as beneficial to the global financial system,

providing stable, long term liquidity into markets• Potential stabilizing force

• Seen by others as an unwelcome intrusion by governments into markets

• Mostly from countries pursuing state capitalism with no or limited democratic institutions

• Risk of having SWFs also pursue national political interest rather than pure commercial interests

13

SWF BANKING STAKES

-12%

-44%

-60%

-42%

-88%

-88%

-69%

-17%

-61%

-91%

Selected Stakes 2007-2008

Note: Share price performance since announcement, as of June 21st, 2009* EstimateSource: Bloomberg, Wall Street Journal, FT

Recipient DateInvestment$ billions Instrument Stake

Share price performance

ADIA Citigroup Nov. 2007 7.5 Convertible 4.9%

Temasek/ GIC

Barclays Jul. 2007 2.0 Equity 2.1%

Merrill Lynch Dec. 07/Sep. 08 5.9 Equity 14.0%

UBS Dec. 2007 9.7 Convertible 10.0%

Citigroup Jan. 2008 6.8 Convertible 3.7%

KIA Citigroup Jan. 2008 3.0 Convertible 1.6%

Merrill Lynch Jan. 2008 2.0 Convertible 4.0%*

CIC Blackstone May 2007/ 2009

3.0+ Equity 10.4%

Morgan Stanley Dec. 2007 5.0 Convertible 9.9%

QIA Barclays June 2008 6.4 Equity 6.4%

14

NOT COMPREHENSIVE

Top Sovereign Wealth Funds

15

Top SWFs by AssetsAs of Q4 2008

Note: China numbers comprise funds from SAFE Investment Company, CIC, and the National Social Security Fund; Abu Dhabi numbers comprise numbers from ADIA and ICD; Singapore numbers comprise those from GIC and Temasek.

Source: Sovereign Wealth Fund Institute, UBS

123456789

10

Rank CountryAssets$ billions

Abu Dhabi – UAE ChinaSingaporeSaudi ArabiaNorwayKuwaitRussiaHong KongQatarLibya

9575864644333012641901736050

Driver

OilManufacturing exportsNon-commodity exportsOilOilOilOilNon-commodity exportsOilOil

Risks and Benefits of SWF Investments

16

• TBD

Factors supporting “open arms” approach Factors supporting cautious approach

• TBD

Aggressively court them Monitor them closely

TBD TBD

Be neutral

TBD

AGENDA



Mutual Funds

Hedge Funds



17

Overview of Hedge Funds Strategies

18

Quantitative Strategies

Global Macro

Event-Driven

Relative Value

Long-short Equities

Major Strategies

Fundamental Strategies

Equities

Fixed income

Cash

Commodities

Real Estate

Currencies

Basic Approach Assets

Hedge Fund Leverage

Gross Market Exposure As a % of AUMs

Source: Hennessee Group; International Financial Services London, McKinsey Global Institute 19

128% 125%

159%

138%

117% 121%

141%148%

155%161%

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Hedge Fund Assets Under Management

In US$ Billions

Source: HFR

CAGR

22%

20

38.9 58.4 95.7167.8167.4185.7

256.7367.6374.8

456.4490.6539.6

625.5

820.0

972.6

1,105.4

1,464.5

1,868.4

1,407.1

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

Hedge Fund Net Asset Flow

In US$ Billions

Source: HFR 21

0.0 8.527.9 36.9

-1.1

14.7

57.4

91.4

4.4

55.3

23.346.5

99.4

70.6 73.646.9

126.5

194.5

-154.5

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

Asia – Focused Hedge Fund Assets Under Management

In US$ Billions

Source: HFR 22

31.3

41.0

51.1

60.8

80.8

111.4

71.465.0

2002 2003 2004 2005 2006 2007 2008 2009 Q1

Number of Hedge Funds

Note: Does not include fund of fundsSource: HFR 23

530 694937

1,2771,654

2,0062,3922,564

2,8483,102

3,335

3,904

4,5985,065

5,782

6,665

7,2417,634

6,808

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

Number of Asia-Focused Hedge Funds

Note: Does not include fund of fundsSource: HFR 24

348

429

532

698

811

1,047 1,025

2002 2003 2004 2005 2006 2007 2008

Hedge Fund AUM by Strategy

As of Q4 2008

Source: HFR

Total = $1.4 Trillion

25

Total = $71 Billion

32%

53%

30%24%

11%20%7%

24%

All Hedge Funds Asian Hedge Funds

Equity Hedge

Relative Value

Event Driven

Macro

Location of Asia-Focused Hedge Funds

23.2%

11.2%

20.2%

3.7%

8.3%

8.7%

24.7%

Management Firm LocationAs of Q4 2008

Source: HFR

USA


China

Singapore

Other

26

Australia

Japan

UK

Hedge Fund Returns

5.8

32.2

21.2

30.9

4.1

21.5 21.116.8

2.6

31.3

5.0 4.6

-1.4

19.6

9.0 9.312.9

10.0

-18.9

9.8

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

Annual Total ReturnIn percent

27Note: Hedge fund returns net of fees and equally weighted; 2009 YTD as of May 2009.Source: HFR

2009 YTD*

Hedge Fund Returns in Comparison

1990-2008Rebased to 100

Note: Hedge fund returns net of feesSource: HFR, Bloomberg

0

200

400

600

800

1000

1200

1989 1991 1993 1995 1997 1999 2001 2003 2005 2007

HFR Hedge Fund Index

MSCI World Index

CAGR

11.8%

2.6%

28

Asia ex-Japan Focused Hedge Fund Returns

10.114.2

27.6

34.1

-33.6

8.5

2004 2005 2006 2007 2008 2009 YTD

Annual Total ReturnIn percent

Note: Hedge fund returns net of fees; 2009 YTD as of end of April.Source: HFR

29

Asia Ex-Japan Focused Hedge Fund Returns in Comparison

Note: Hedge fund returns net of feesSource: HFR, Bloomberg

0

50

100

150

200

250

300

2003 2004 2005 2006 2007 2008

HFR Hedge Fund Index

MSCI Asia ex-Japan Index

CAGR

7.4%

2.4%

2004-2008Rebased to 100

30

Limitations of Hedge Fund Returns Data

Backfill• Funds that are added to the database tend to be those that

have had a period of positive returns

Self-Selection• Reporting is not mandatory – done on a voluntary basis• Funds with good returns more inclined to report their

numbers

31

Survivor Bias• Returns are overstated because database does not capture

funds that have failed• When a fund shuts down, its performance history tends to be

removed

• A study done on a universe of 3,500 hedge funds shows the significant impact of both biases (Ibbotson and Chen, 2006)

• Between 1/1995 and 4/2006, hedge funds returned a CAGR of 16.4% net of fees

• Excluding the two biases, the CAGR is reduced to 9.0%• Still found a positive Alpha and a higher Sharpe Ratio• When combined with diversified portfolio, hedge funds add positive

Alpha and beneficial diversification

Source: Roger Ibbotson and Peng Chen, “The A, B, Cs of Hedge Funds: Alphas, Betas, and Costs”, Yale Working Paper, September 2006.

Hedge Fund Returns by Strategy – 2008

-37.3

-33.7

-25.3

-23.6

-22.9

-21.7

-17.6

-6.0

-5.0

-2.9

4.7

28.4

2008Percent Returns

Source: HFR

Short Bias

Macro

FI Asset Backed

Merger Arbitrage

Equity Market Neutral

Relative Value

Event Driven

Quantitative Directional

FI Corporate

Distressed/Restructuring

FI Asset Backed

Emerging Markets

32

AGENDA



Mutual Funds

Hedge Funds



33

Future of the Investment Management Industry

34

Hedge Funds

• Decrease in AUMs following financial crisis and poor performance• Consolidation • Pressure on the “2 and 20” compensation structure• Lower leverage

• Some strategies requiring high leverage no longer viable in near term• Increase in regulation

• Increased transparency• Mandatory registration?• Leverage cap?

• Question mark on industry’s ability to continue to attract top talent in near term given greater regulation and high water marks

Asset Management/ Mutual Funds

• Decrease in AUMs following financial crisis• Consolidation• Increasing competition from index funds for simple beta exposure• Continuing loss of ground to alternative asset vehicles

• Pressure to offer products that mimic alternative assets• Continuing pressure on fee structure• Proportion of assets owned by retirees will increase affecting primary

investment goals• Greater focus on income generation and principal preservation

Trends

Source: McKinsey & Company; JCdS

AGENDA



Mutual Funds

Hedge Funds



35

Simplified Investment Framework for Global Macro Approach

36

Asset classes/ markets

• Which asset class appears more attractive? What are prospects for equities versus fixed income versus commodities?

• What are expectations for global economic growth?• What are prospects for global risk appetite?• What are expectations for US and global interest rates?• What are prospects for oil prices?

Key questions NOT COMPREHENSIVE

Geography

• What are prospects for emerging markets relative to developed markets?

• For commodity/oil-exporters versus manufactured good exporters?

Country

• Which countries appear most attractive considering their economic growth prospects relative to their valuation?

• What are the risks of a balance of payments crisis?• How strong is the currency?• What are prospects for the country’s interest rates?• What are the risks of economic dislocation? Political

change? • What are the geo-political risks? Risks of war?

• Do you have expectations that are different from the consensus and what is already embedded in asset prices?

• Do your expectations diverge on factors that are significant enough to have a tangible effect on asset prices?

• What will be the catalyst that will trigger a change in asset prices?

• What is the timeline?

Simplified Investment Framework for Long-Short Equities Approach

37

Sector

• What are the sector’s earnings growth expectations?• Which sectors offer most attractive profit/cash flow growth

prospects relative to their valuation? Relative to expectations?

Macro

• Is it a good time to invest in equities?• Are emerging markets/Asia ex-Japan/China attractive

relative to developed economies? • How will changes in global economic prospects, commodity

prices, and interest rates affect equity prices?• What are the risks for the sector/company to be affected by

political change? Geo-political turmoil? War?

Key question

Company

• Is the company attractive? Competitive relative to peers?• Are growth prospects attractive? Are they in line, better, or

worse than company guidance? Than market/buy-side expectations?

• Are recent trends (sales, Average Selling Prices, store openings) positive?

• Are margin trends better/worse than expectations?• Are earnings prospects attractive relative to expectations?• Is the company’s balance sheet adequate to fund growth?

Does the company need to raise capital?• Are there corporate governance risks?

NOT COMPREHENSIVE

• Are your expectations for the sector/company’s earnings growth different from consensus?

• Are valuations attractive relative to historical averages, peers, or prospects?

• What will be the catalyst that will trigger a change in expectations and valuation?

• What is the timeline for the catalyst to materialize?

the rise of asian capital markets · 2009-06-21 · real estate funds pension funds endowments fund...

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