The concept of  ‘outcome-oriented investing’ is now being talked about in the context of Asia’s fund management market. Several speakers at the recent Fund Forum event in Hong Kong suggested that a sea-change is occurring, and a greater alignment of interests will result.

The idea of outcome investing is not at all well understood in Asia currently. But could it become a popular concept as part of a supposed moved to create a more sophisticated long term saving mentality? According to ING Investment Management chief executive Alan Harden, the question the company asks in its US information campaign is ‘at what point do you become financially free?’ The catchphrase is, ‘Know your number’ - that is, the amount you need to create the lifestyle you want. No mention of retirement. More, what is the life you want and how much do you need to fund that? It is encouraging for the future of Asia’s fund savings market that such ideas are now well-established in the US.   

RCM’s chief executive Mark Konyn suggests that product development in Asia will naturally evolve as a result of the pain felt by investors during the recent crisis. “I think we will see a fracturing of product design. This will be primarily led by investor behaviour and will generate new ideas. I expect to see plenty of geographic, sector specific and outcome investing style products. We are seeing signs of it now, with the concept of lifestyle planning and wealth planning. I think we will see more market segmentation, and by understanding that segmentation, fund groups will find it possible to design capabilities that fit the need.” He mentioned ETFs as having shaken things up; “giving people another way of accessing markets. It will affect the way fund managers think about serving these markets and the distribution costs involved.”

David Jiang, BNY Mellon Asset Management’s managing director Asia Pacific believes that simplicity will be a key factor in future fund models. “We are likely to see a more structured environment, with the delivery of specific performance based on low volatility, market neutral, perhaps protected strategies. It will lead to the banks and the distributors working with fewer providers, or even working with a single manager who can provide a wide range of products. This concept also works well in terms of due diligence and relationship management”

Konyn adds, “Distributors and gatekeepers will take more responsibility for making the investment allocation and will have a deeper relationship with the client. Outcome oriented investing will become much more the norm. And for the fund group, capacity management will become more of an issue. Raising millions and seeing your alpha reduce will not be accepted by fund managers. It is up to us to deliver good capacity management.”

The fund promoters should get back to basics. That is view of Ka Shi Lau, chief executive of Bank Consortium Trust in Hong Kong. The reaction of investors to the “convoluted solutions” of the Lehman era, is a move away from anything that smacks of risk-taking. Lau says, “We got to the point where products were so complex that advisers were not able to properly explain the risks.” Proper disclosure and better education are needed, which places more responsibility on the fund managers, but also the regulators: “A regulator needs to understand the products, but I think they often only scratch the surface,” says Lau. “So the market needs fund managers to keep it simple. I’d like the industry to look at that, and to make the effort on education.”

Not everyone agrees with the idea that change will come as a result of the crisis.

Schroders’ Asia chief executive Lester Gray thinks we have been here before and that nothing much has changed: “I think investor behaviour is either ‘risk on’ or ‘risk off’,” he says. They will pick the highest beta equity market they can access, or low bond-like returns. It is only when people are saving on the basis of securing their retirement, by saving for the long term, that they will embrace the idea of outcome investing. That is not the case in most Asian markets.”

Naomi Denning, managing director of Towers Watson Investment Consulting said it in another way. The pressure for change may be strong, she said, “but inertia is a very powerful force. It is easy to predict change, but action is harder to achieve. For that reason, said Denning, it is open to question whether a greater alignment of interests will occur.

Nonetheless, Towers Watson has assessed how interests could be better aligned, especially in the context of Hong Kong’s Mandatory Provident Fund. Traditionally defined contribution investment strategies have tended to be more driven by ‘supply’ (that is, what investment managers and/or plan fiduciaries want to offer) rather than ‘demand’ (what members actually want and need). TW’s view is that “DC is about the member and, as such, one might argue that it is very difficult for a fiduciary to set an effective investment and member engagement strategy without a thorough knowledge and understanding of the plan membership and how it segments.  Membership segmentation can be achieved with data gathering, company analysis and individual information.  In practice, there are three types of members:

•    True-defaulter: prefers to leave this journey management passive

•    Guided-selector: makes some personalisation decisions to help this journey management

•    Self-selector: designs their own investment strategy actively and make necessary adjustments throughout the journey.

Naturally, the majority of so-called ‘factory-based’ employees are in the first category of true defaulters. There will be more of the guided selector and self-selector in the managerial level job functions. Towers Watson says, “Since DC is about an individual member’s challenge of having enough savings to fund their own retirement, it is important to understand that particular member’s retirement aspirations and risk tolerance profile in order to identify the most appropriate investment strategy.

One solution highlighted by State Street in its recent Vision paper on defined contribution, is the target date fund. This concept is a major feature of the 401k market in the US, though without its drawbacks (see the accompanying feature). State Street’s senior managing director in Japan, Justin Balogh says target date funds “ensure a greater degree of appropriate investment structure right to the end. The idea is that you create focused flexibility, rather than flexibility for flexibility’s sake.”

Bank Consortium Trust is another group that believes in the idea of target date funds as a solution for long term saving. Ka Shi Lau agrees that education and a greater effort to meet the needs of the market are the keys to a successful outcome for investors. “Choice without knowledge is not going to work. MPF members are being asked to make a decision about choice. But the statistics show that only 10% of members pay attention to their MPF account, and only a few of those people will really pay attention to the detail.

“The current concept of MPF is having, it is not investing for your retirement. People may know how to buy into an IPO, but they don’t think long term. They have no conception of longevity risk. The idea of saving for 30 years to fund 30 years of retirement is not something they understand.

“It starts with education, from school level right up to university. Employee choice is a step in the right direction, but only when it is combined with education and engagement. The Government should get behind the education campaign.”

Topics