Conversations with asset managers

Gareth Stokes, FAnews Online Editor

If you want to get a handle on global markets there’s no better way than talking to the guys who interact on an ongoing basis with big institutional investors. And it helps if the company you talk to has significant exposure to the world’s dominant managed-fund markets. To find these markets we turn to data published by BCG Global Asset Management, which puts the global pool of professionally managed investments at $56.4 trillion at the end of 2010. The bulk of these funds are in the US ($27.6trn) with Europe ($16.7trn) trailing by quite some margin. Japan and Australia account for a combined $5.3trn while the rest of Asia weighs in with $2.9trn.

Presenting at the Investec Global Insights Forum held at the group’s Sandton headquarters 13 September 2011, John Green, Head of Global Client Group at Investec Asset Management said the company was already “engaged” within each of these markets. The division manages around R640 billion in assets globally, the bulk of which are in Africa (52%) and the UK (21%). Green said that aside from “the radical change in asset ‘own home bias’ thinking” there were three major themes that emerged from his discussions with institutional clients over the past half-year.

Three themes in global asset management

The first theme is that growth is becoming an increasingly scarce commodity. It is not a new observation and the financial media has been dominated by ‘investing for the new normal’ stories since recessing hit back in 2008/9. “Instead of banking on equities to provide return as they have in the past, these asset owners are now asking where future growth will come from,” said Green. Lower returns have forced large pension fund managers and other institutional clients in the US and UK to drop their ‘home bias’ thinking in favour of better return options offshore. Where will they go?

Over the past year or two the obvious destination for yield seeking capital has been emerging markets – more specifically commodity rich countries. But the emerging market story is starting to wear thin. Green explains: “A lot of the asset owners out there believe they have got on to the back end of the emerging market story – and that the next growth opportunities will probably present in frontier markets.” Unfortunately these economies are too small for large institutional investors to get involved in. Asset managers will probably ‘plug the gap’ by offering specialist equity products such as global small cap funds and so-called ‘quality’ share strategies...

The latest thinking is that there are probably five big emerging markets and a handful that qualify as ‘second tier’ opportunities. Instead of a portfolio manager hiding behind a screen in New York thee larger institutions could dedicate resources to each of the big markets. It is quite likely asset owners will pay more attention to South Africa in the coming years.

The inflation threat

The second theme identified by institutional investors is inflation. They are wrestling with whether or not it is a threat, and how to protect their portfolios as the threat develops. After two rounds of quantitative easing in the US global investors are acutely aware of the likely ravages of inflation on their capital. “Assets with inflation protection characteristics are becoming more and more important,” said Green. And that explains why international investors have been clamouring for so-called “real” assets in the commodities, real estate and infrastructure sectors. “Investec is recognised in the top three globally in commodity and resource management – a client thinking of taking a significant position in commodities will certainly give us a call,” he said.

A total rethink of fixed income portfolios slips in as the final theme in Green’s presentation. “Historically the developed world wealth managers had a simple approach to fixed income. They held large core portfolios with extreme home country bias,” he said. As they chase higher yields ‘local currency emerging market debt’ will play a much bigger part in developed world asset allocation strategies. Emerging market debt has become an important and new area for asset owners with a fixed income focus.

Institutional investors in the US, UK and Europe are loading up on government paper in country’s such as Brazil and South Africa. And that’s why emerging market currencies remain so strong. There is strong flow of cash into South Africa underpinning the rand – and the trend will continue. Green concluded: “Large institutional investors don’t care about what the currency cross is today – they want to make an asset allocation for the next decade – and they will make it!”

Editor’s thoughts: The Investec Global Insights Forum provided useful insight into how Investec Asset Management interacts with its global institutional clients. And the themes identified by the group tie in with the short-term news flows we’ve heard in recent months. Would you be able to stomach the risk involved in investing in African frontier markets such as Kenya, Mauritius, Nigeria or Tunisia? Please add your comment below, or send it to gareth@fanews.co.za