Asian equities no longer an asset class?

One of the ironies about the way big pension funds are rethinking their asset allocation strategies is that regional specialisation appears to be becoming less popular, even for the world’s fastest-growing region.

Greg Bright*

In the continual evolution of their thinking and given a hurry-up by the global financial crisis, asset allocation has clearly been re-emphasised as the most important decision a pension fund’s governing board and staff can make.

In this context, bigger decisions than geographical spread are being made. Equities may not be the free risk/return provider that we once thought. Risk parity and risk premia approaches to asset allocation are being explored.

And then there are the big themes. Food, water and resources are fairly easy to understand with a world population getting ever larger. Globalisation is interesting. And the emerging markets, the countries set to grow faster than most of the west in the next 20 or so years, also represent an important consideration.

Regional mandates from pension funds became popular in the mid-1990s. Asia ex-Japan mandates, in particular, took off as big fund managers exploited their regional capabilities. As did Latin American mandates.

But in the past few years, the world has changed. Pension funds seem to be much less interested in taking regional bets, even when they believe a certain region is likely to grow more rapidly than others.

I have no hard evidence for this; only anecdotal. Fund managers in the Asian region, mostly based in the easy-entry cities of Hong Kong or Singapore, say that it is increasingly difficult to ‘sell’ Asia ex-Japan funds or mandates to pension funds anywhere.

Asia ex-Japan funds and mandates are reasonably stable. Client pension funds are generally happy to leave their money there. As well they should. Asia ex-Japan indices have performed very well in the past 10 years, since the Asian Contagion crisis in the late 1990s. But very little new money is flowing in.

Rather, pension funds are taking country-specific bets, such as Greater China, or they are buying ‘emerging markets’ as defined by the big index houses such as MSCI, or they are buying the BRICs (Brazil Russia India and China).

There are several possible explanations for this. There is the gradual realisation that Asia is not a harmonious group of countries. The China ‘A’ shares market has increased about four-fold in the past 12 years, for instance, whereas nearby Taiwan has been dead static.

While trade within regions, such as Asia or Latin America, is big and growing, their sharemarkets do not always reflect this. Back to the Greater China story: Taiwan’s economy is estimated to be 40 per cent dependent on China’s, yet its market has not, yet, reflected the China growth story.

And with the rise in the perceived importance of alpha by pension funds, and therefore stock selection, there may be a growing realisation that each country’s share market has significant-enough differences to warrant different sorts of mandates.

Different countries within different regions also present their own implementation peculiarities. In some emerging markets, an institutional investor may well be better off exploring private equity opportunities rather than public equities because of various distortions in the public markets.

None of this represents a real problem for pension funds. It probably just reflects an increasing level of sophistication and understanding of the world.

But fund managers had better get on board if this trend continues and look to re-invent some of their product strategies.

*Greg Bright, the publisher of, has been based in Beijing for the past three months. This is his last column from there before returning to Australia.`