In this difficult environment where many investors expect the world economy to go into a double dip recession, Scottish Development International and UK Trade & Investment organised an asset management seminar in Beijing on 15 September 2010.
The event was launched by the City of London Lord Mayor, Nick Anstee, who emphasised the scale and global outlook of the UK asset management industry. 20 per cent of the global asset management industry is based in the UK and there is still a growing number of overseas asset managers who elect to set up in the UK. In the first quarter of 2010 alone, 21 new overseas asset managers were authorised, twice as many as last year.
The event attracted more than a 100 institutional investors and asset managers from China and across East Asia. It was exceptionally well received and the speakers engaged in several interesting discussions with the audience.
Both UK and Chinese asset managers made a strong case for active investment strategies (see footnote 1) and diversification into uncorrelated asset classes such as socially responsible investments.
During the “lost decade for stocks” which is characterised by the fact that most market indices are at the same or at a lower level today than 10 years ago, active investment strategies have tended to outperform the market. Those active asset managers who did not outperform have tended to be too passive and effectively reproduced the indices in their portfolios, according to Gavin Scott from Baillie Gifford.
An active investor is going to make wrong decisions from time to time and, again according to Gavin Scott, what makes a true active investor is that they will underperform once every three years on average, they will have a low turnover and they will work for an independent fund manager. Donald Amstad from Aberdeen Asset Management fully concurred; he never looks at the components of an index when making an investment decision and the turnover of his portfolio is extremely low with only two new investments in 2010.
Another true active investor is William Lowndes from Threadneedle; he believes that in the last twenty years, too much time has been spent by the industry measuring against the indices. Diversification has not always worked because many asset classes turn out to be closely correlated. Instead, he strongly recommends investing in the new breed of absolute return funds under UCITS III (see footnote 2). This new asset class, which has many of the benefits of hedge funds, does not have some of the drawbacks; there are limits on risk, requirements for liquidity and funds have to be stress tested on a daily basis.
There is a strong interest in absolute return products in China according to John Wu from China International Capital Corp (CICC) whose firm has just launched the CICC Safe Return Fund, a fund specialising in that type of strategy. He emphasised the need to develop such products given the exceptional growth of personal financial assets in China which are expected to account for 10 per cent of total worldwide personal financial assets by 2015.
An active investor generally looks at value investments and this is the case for Lu Shengliang from NSSF who always focuses on long term gains. Thanks to this approach, he has achieved substantial returns in recent years. Ke Shifeng from Martin Currie is also a value investor; he adopts a bottom up strategy by carrying out in depth analysis of 1,200 Chinese companies per year.
Socially Responsible Investing is an important asset class for the active ethical investor who is looking for uncorrelated assets; it is one that Lu Shengliang follows very closely when investing for the Chinese ageing population. However, Neil Sandy from Truestone Impact Investment Management believes that the term Socially Responsible Investing is too often based on exclusions rather than positive selection and he prefers to use the term Impact Investing. He is looking at investments that solve social and environmental problems and deliver a financial return such as renewable energy, sustainable forestry, microfinance, agriculture and social housing.
In the fight against correlation within a portfolio, Michael de Vere from Standard Life Investment is promoting the Global Absolute Return Strategies (GARS); it consists of a broad range of return seeking strategies chosen specifically to work well together. The objective is to reduce risk but not at the expense of returns.
Footnote 1: Active investing involves making specific investment decisions with the view to outperform the market as opposed to passive investing where the managers aims at investing in the components of a market index.
Footnote 2: Undertakings for Collective Investment in Transferable Securities ("UCITS") are a set of European Union Directives that aim to allow collective investment schemes to operate freely throughout the EU on the basis of a single authorisation from one member state.
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