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21-23 April 2010
Four Seasons Hotel Macao, Cotai Strip®, Macao, China |
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Interview
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FOR IMMEDIATE RELEASE No region has been spared in the recent economic crisis but Asia-Pacific looks likely to emerge stronger than most, with several well-performing economies and plenty of opportunities on the horizon. To get the most out of a region that will be driving global growth, investors should review their investment and risk assessment strategies and prepare for when the markets take full speed. Hansjoerg Germann, Chief Investment Officer, Asia-Pacific & Middle East of the Zurich Financial Services Group, and the Chairman of the marcus evans APAC Investments Summit 2010 taking place in Macao, China, April 21 – 23, 2010, shares his thoughts on asset liability management and his solutions for the current low-yield investment environment. What are the key challenges facing institutional investors in the APAC region at the moment, and what solutions would you recommend? Hansjoerg Germann: In most Asian markets - excluding Australia and Indonesia - interest rates and bond market yields are very low. Bond market yield curves tend to be good predictors of the future; quite efficient tools to see where interest rates are heading using today’s information, as these markets are frequently analysed and traded by professional investors. If we take this to be true, we can draw the conclusion that long-term yields will stay low for quite some time, probably years. This low-yield environment is something new to most of Asia. After strong performance of prices, real estate yields in the region are also lower, but somewhat consistent with the bond markets. Equities have recovered very strongly, and valuations today already assume a relatively good development of corporate earnings for the next reporting periods. However, that is a bit risky, as it is unclear whether these good earnings expectations will actually materialise, so we should be careful with equity markets and accept lower future yields than in the past as well. It is very difficult to find a solution to the low-yield problem, but what we can do is focus on the things that we can influence: one of them being expenses. Investment expenses are the only things that are certain in our portfolios and they can be planned and managed. If an average sized institutional investor has 1.5 per cent gross yield and 0.15 per cent (i.e. 15 basis points) in expenses, that means 10 per cent of the gross yield is lost. When interest rates were higher in the past, this cost element in proportion to the yield was much lower. This problem is particularly severe in short-term bond portfolios because short-term yields have dropped to near-zero levels in many markets, which means expenses relative to yield have increased massively, pushing you towards a zero or even below zero net yield. Managing these expenses is really important and investors can do that by automating processes and efficiently outsourcing certain elements of the value chain. This may bring in only a few basis points, but I would really recommend that chief investment officers look into this. The expense element is also an issue to be addressed regarding private equity and hedge funds investments which are asset classes with expensive cost structures when compared to the same “beta” exposure in traditional asset classes. What long-term strategies would you recommend to chief investment officers? Hansjoerg Germann: We strongly believe in diligent asset liability management. Every insurance business or pension fund has certain future obligations to clients or beneficiaries, so our actuaries calculate the structure of these obligations and we as investment managers try to find a strategy that outperforms these obligations. Our strategy is really geared towards producing the future liability cash flows in a very careful and controlled way without taking bets or risks clients are unaware of. With life insurance investments in Asia, there are a lot of long-term guarantees, and if insurers would want to hedge them today, they have to buy long-term bonds at very low yields. This locks them into very low investment returns for a long time, but the only other choice is to run an open risk position, which could end up in disaster if the bet does not pay off. There are only two choices really: following the liabilities and trying to replicate what you can and if you do not, it could be a very dangerous game. What are your projections for 2010? Hansjoerg Germann: Firstly, it is important to acknowledge that one of the key causes of the crisis was the availability of cheap credit - particularly in the real estate markets in the U.S. and a number of European countries - and cheap financing at high levels of leverage available to the financial system. Regulators are putting a lot of pressure on banks to improve their capital position, and I do not expect that this will end anytime soon. We should also not forget that many markets are still supported by massive government support, which will have to be phased out. For the next few quarters or years, any strategy that in the past relied on easy leverage or cheap financing may run into trouble, because some of these loans may not be refinanced by the banking system. That includes private equity, possibly hedge funds and commercial real estate, and as financial markets are globally integrated, this will not be confined to any region. This is something that APAC investments are not immune from - with the exception perhaps China, where banks still have little interaction with the rest of the world’s banking system. One trend we may start seeing in Asia is more outsourcing of portfolio management to increase yield. Let me explain the background: to manage a corporate bond portfolio well, you have to analyse several hundred companies, collect lots of data for proper bottom up credit analysis, do management interviews and read plenty of prospectus material and research. This requires significant investments into systems and staff, but is often half heartedly done by too small internal teams which may not have the resources and access to information that specialists have. I expect to see a professionalisation of this, with investors starting to use specialised managers for their bonds, equities, and other products. The good thing is that this does not need to be more expensive than the in-house solution any more, as there is plenty of capacity and competition among excellent and large asset managers which have the necessary scale to finance the required infrastructure and are able to offer attractive career paths to the best portfolio management talent.
Sarin Kouyoumdjian-Gurunlian
Zurich Financial Services Group (Zurich) is an insurance-based financial services provider with a global network of subsidiaries and offices in North America and Europe as well as in Asia-Pacific, Latin America and other markets. Founded in 1872, the Group is headquartered in Zurich, Switzerland. It employs approximately 60,000 people serving customers in more than 170 countries. For more information, please visit the company website at www.zurich.com
This unique forum will take place at the Four Seasons Hotel Macao, Cotai Strip®, Macao, China, 21 – 23 April 2010. Offering much more than any conference, exhibition or trade show, this exclusive meeting will bring together esteemed industry thought leaders and solution providers to a highly focused and interactive networking event. The summit includes presentations on market trends and predictions, dynamic asset allocation and revamping investment strategies. About marcus evans Summits marcus evans Summits are high level business forums for the world’s leading decision-makers to meet, learn and discuss strategies and solutions. Held at exclusive locations around the world, these events provide attendees with a unique opportunity to individually tailor their schedules of keynote presentations, think tanks, seminars and one-to-one business meetings. For more information, please visit www.marcusevans.com All rights reserved. The above content may be republished or reproduced – kindly inform us by sending an email to press@marcusevanscy.com |
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