Lower market liquidity implies that the price adjustment mechanism will be disrupted, which obviously is not favourable for managers like us who make investment decisions based on fundamental research.
Regulation of the ‘shadow banking system’ is another issue that concerns us. Money market fund (MMF) products are undergoing heavy scrutiny and may be subject to further regulation after they were deemed to be one of the factors that contributed to the systemic risks that arose during the financial crisis.
However, we need to keep in mind that MMFs play an integral role in the short-term money markets and any regulations that restrict sound investment activities due to over-emphasis on investor protection should be avoided.
Not all asset management companies need to offer absolute return investments. Companies that offer long only investments with a comprehensible investment process and a record of consistent performance are still in demand.
However, we could see more relative return products that offer short positions in the future. Beta-based expected return is declining as global economic growth decelerates. In terms of generating alpha, products that incorporate short strategies may be effective in such an economic environment.
In terms of the Japanese retail market, the expansion of defined contribution (DC) plans will be the main catalyst for driving growth. As we saw in the US, the DC effectively encouraged individuals to take an interest in their long-term mutual fund investments. In Japan, the DC market has more potential for growth compared to the defined benefit market. However, in order for this to happen, the authorities will have to implement reforms to make the defined contribution system more accessible.
Among Asian emerging countries, one that has struck me by its development has been Malaysia, which has been one of the first to adopt active measures to improve its welfare system. This, in turn, led to the development of their pension system. Malaysia’s high saving levels have been utilised productively and have made a contribution in bolstering the country’s economy.
Moreover, the government’s strong support and advocacy for the development of its local asset management industry has created an environment where the asset management business can flourish. As the economies of other emerging countries continue to expand, they will face the task of improving their pension and welfare systems, and this is one area in which these countries can learn from Malaysia.
I would say globalisation within the industry and IT developments have had a big impact on the industry over recent years. The size and sophistication of databases containing vast amounts of information and the increased availability of competitive products that can be offered to clients around the globe have definitely altered industry standards.
In tandem with the globalisation of the funds industry, led by UCITS funds, we are seeing a new trend for asset management companies to supply their clients with products in which they are specialised or hold a competitive advantage. To survive in such an environment, asset managers have begun to concentrate more of their energy towards the asset class of their speciality.
The overall increase in the number of information vendors has made searching for investment vehicles more convenient for investors. Moreover, asset management companies are also searching for more effective and productive methods of providing useful information to their clients.
The growth of passive investing may favour the hedge fund sector, but it can also benefit all active managers. The more assets that are managed using a passive approach, the more opportunities active managers may have for alpha generation in the long run, since they will be able to take advantage of the market inefficiencies that can result from increased use of index tracking.
Passive investment may not always be the optimal approach in all asset classes. Take the debt market as an example – just because a country is issuing more debt and therefore takes up a greater proportion of the index, it does not necessarily make it a sensible investment.