Opening up the Asian marketplace

For a pure fixed income specialist, breaking into the Asian fund market, where investors are traditionally equity oriented and have been spoilt by the incredible returns delivered by a booming market, cannot be an easy task. “We are competing against a domestic equity market that historically has returned some very good numbers. So you need to offer bond products that offer more yield than a government bond portfolio,” said Brian Baker, chief executive officer at Pimco Asia. The Dublin-based Ucits III funds that the firm has registered in Asia cover the whole spectrum of fixed income products, including traditional bond funds, emerging market debt, corporate bonds, sectors specific funds, such as inflation protected bonds and mortgage backed securities. Investors in Asia have a very speculative nature, but the downturn in the market is changing their risk tolerance, said Mr Baker. “Also, naturally people will recognise that, as they get old, they can’t afford to take the high risk-high volatility in their portfolio, and they need to save for their retirement.” Regulation is also making the investment in offshore products a more straightforward process. In Taiwan for example, changes in regulation three years ago have allowed foreign currency offshore funds to be registered domestically. “We have registered five higher yielding funds domestically in Taiwan and we are distributing and gathering assets now from a wide range of distributors,” he said. China and India, “the big elephants in the room,” are also gradually opening up. In China, through the QDII programme, the Chinese Government is slowly allowing domestic investors to invest overseas but there has been little bond offering under this scheme. QDII products launched to date have been in the Asian and Hong Kong equity markets mainly, and in the global markets more recently, but reported performance has not been good. Throughout 2007, the QDII programme faced investors’ expectations of Remninbi (RMB) appreciation and strong domestic equity markets, which explain little appetite shown to invest overseas. Even with the domestic markets downturn last year, continued expectations of significant RMB appreciation set a high hurdle to make overseas investment attractive. The outlook for QDII for 2009 is mixed, said Mr Baker, mentioning that the forward market is pricing in a 2.5 per cent RMB depreciation but the domestic market is off to a strong start for the year ahead. A significant slowdown in regulatory approval for new QDII allocations - last approval was in April 2008 - and weak and confusing overseas markets are also tempering investor interest, he said. In India, similarly, there are strict regulations and hurdles to invest overseas and the Indian domestic market is very vibrant and developed. “We have looked at offering domestic products in India, but consistent with Asia as a whole, most Indians invest in the equity market. Fixed income is viewed like a cash management vehicle for corporations, most individuals don’t invest in bonds domestically, but keep their money on deposit with banks,” he explained. Mr Baker predicts that as investors in Asia become more powerful, distributors will lose their supremacy in the distribution network. This will affect the fees that distributors charge, it will increase the take-up of the open architecture concept and the appeal for fixed income could also rise. “Distributors get paid an inordinate amount of fees to distribute products, but that will be changing over time, as it has in the US and Europe.” “The problem,” believes Mr Baker, “is that there are front-end loads of up to 5 per cent on a bond fund.” If these may be acceptable on an equity product, they are a big barrier for fixed income, he said. “In retail markets, consumers do not understand that if they pay 5 per cent load on a bond fund it means that they probably get close to zero per cent return in a standard bond fund in their first year,” said Mr Baker. “At some point investors are going to get smart and they are going to realise fees are an important aspect of any investment. Once they realise that, distributors will have to start competing in fees and product offering,” he said.

‘Distributors get paid an inordinate amount of fees to distribute products, but that will be

changing over time’

Brian Baker,

Pimco