The financial world is increasingly divided into have and have-nots. Not only do emerging markets have the growth that developed markets can only wish for, but they also have the huge pools of institutional investment money capable of making long term strategic investments that western pension funds are moving away from.
Curt Custard, head of global investment solutions at UBS Global Asset Management took time out of his Asian business trip to speak to IPA about the differences he sees between western developed markets and the rapidly growing emerging markets, many of which are here in Asia.
While the US and Europe are concerned with deleveraging and preventing too rapid of a slowdown, emerging markets continue to grow and must keep their eye on the temperature gauge to make sure that growth does not occur too rapidly.
Custard says US pension funds are shying away from equities and focused on liability directed investments while the sovereign wealth funds that have become so dominate in Asia and the Middle East are taking a different approach.
“We’re seeing a shift now, away from the dominant investor globally being the institutional defined benefit scheme, which is very common in the west, towards more sovereign wealth funds and the massive growing retail space.”
“It’s incredibly important if you are an asset manager to understand that the needs of this market are different. The client base is different,” Custard adds. “Taking a product out of a US institutional space may not work in this marketplace.”
Sovereign wealth funds are taking longer term, strategic positions while pension funds are limited by regulations from taking on the risk that such investments entail.
“US pension plans, on the corporate side at least, certainly can’t [make longer-term strategic investments],” Custard says. “Even public pension plans are having to rethink some of their older strategies. It’s about melding the fact that you have an old world and a new world, and the new world has different objectives.”
The two disparate economic situations are also being played out on the regulatory field. Regulators in developed economies such as the US, UK and Europe are focused on ensuring the public is protected and that another banking crisis is avoided. The sentiment is regulation was not onerous enough, and governments are moving to address that, putting the squeeze on asset managers.
“Out here, the banking crisis never really hit, but also the level of sophistication in terms of regulation is also changing and is dynamic,” Custard says. “The challenge for us is to be able to finesse how you work with the various entities.”
The growing dominance of sovereign wealth funds, fuelled by the growth of their emerging economy home states, also plays a role in this, especially since in many cases the relationships between the funds and their parent governments are ill-defined or not fully transparent. Custard predicts their influence will only grow over the next decade.
“Sovereign wealth funds have a different scope of regulation than traditional private sector players. They are often very tied up into the highest levels of government. There is probably going to be a day of reckoning someday when there is this huge pool of capital controlled by a relatively small number of people.”