For many years pension funds across Asia were content to focus mainly on domestic markets - with high allocations to domestic bonds and equity. This home bias proved costly for many asset owners who missed out on a global uptick in equities, especially in emerging markets. Many Japanese pension funds, for example, suffered particularly poor performance over the past 10 years as they focused their investment strategy on the sluggish domestic stock market. This natural domestic bias is still strong in Asia, but here at MSCI Barra we have witnessed increasing diversification in investment strategies as more and more institutional investors choose our global equity index family - the MSCI Global Investable Market Indices - as the benchmarks for their funds.
The move towards a more global approach has already been underway for several years in major Asian markets. Increasingly over the past year asset owners in markets such as China, South Korea, Taiwan, Singapore and Malaysia have launched or are considering new global mandates based on the MSCI indices - a move further away from their domestic bias. These asset owners have been using our benchmarks to serve as a policy framework for asset allocation, research, manager selection, and risk budgeting. Aside from the breadth and flexibility offered by our global family of indices, clients have told us that a major reason for choosing our indices is that they appreciate the consistency of our methodology, and the quality of our research on the investment process. Another highly valued service is our ability to customize any of our indices to provide benchmarks that better match our clients’ investment universe.
We are seeing this trend towards global allocation accelerating not only with asset owners but also with asset managers. For example in China there are currently 13 asset managers who have Qualified Domestic International Investment (QDII) quota - and this is set to increase. So far, 11 of those companies have chosen MSCI indices as their official benchmarks, including the three most recent quota recipients: e-Fund is using the MSCI AC Asia Pacific-ex Japan Index, Bosera is using the MSCI Zhong Hua + AC Asia Pacific Index, and China Merchant is using the MSCI World Energy + Materials Index for their respective funds.
In China, the stage is being set for international passive and ETF funds - an exciting segment, and an area where MSCI indices play a leading role. Today, around $235 billion follows ETFs based on our global indices - more than any other index provider. ETF flows further demonstrate the move to international investing.
Pension funds and sovereign wealth funds are looking for cost-effective and efficient ways to access equity markets outside their domestic base. The proliferation in choice, liquidity and assets of comparatively low cost index-linked products such as ETFs demonstrates asset owners are taking note of these “cheaper beta” products.
Overall, with these general trends, we are confident about the future of our business in Asia. We have a large presence with nearly 300 staff in the region and Asia Pacific now accounts for 15 percent of our revenues. What’s next? We are now looking at opening an office in South Korea.
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