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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
Overview of the “Buy-Side”
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
2006 Total = $63.7 Trillion
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
Overview of the “Buy-Side”
Mutual Funds
Sovereign Wealth Funds
Hedge Funds
Prospects for the Asset Management Industry
Investment Frameworks
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
Overview of the “Buy-Side”
Mutual Funds
Sovereign Wealth Funds
Hedge Funds
Prospects for the Asset Management Industry
Investment Frameworks
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
Overview of the “Buy-Side”
Sovereign Wealth Funds
Mutual Funds
Hedge Funds
Prospects for the Asset Management Industry
Investment Frameworks
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
2008 Total = $1.4 Trillion
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
Overview of the “Buy-Side”
Sovereign Wealth Funds
Mutual Funds
Hedge Funds
Prospects for the Asset Management Industry
Investment Frameworks
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
Overview of the “Buy-Side”
Sovereign Wealth Funds
Mutual Funds
Hedge Funds
Prospects for the Asset Management Industry
Investment Frameworks
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?