There is a revolution currently taking place in the Asset Management industry which may help to solve one of the biggest problems faced by investors in Asia, namely how to access the widest selection of investments without taking a foreign currency risk.
For anyone who has ever tried to create a portfolio of equities and fixed interest securities, in most countries in Asia you are immediately confronted by the problem of lack of quality defensive assets to invest in. While emerging markets can offer high growth potential companies there is very little in the way of well established businesses in sectors such as Utilities, Consumer Staples and Pharmaceuticals offering lower volatility dividend plays. Basically Coca Cola only trades in US Dollars.
If an Asian based investor chose to buy a portfolio of low risk defensive stocks on the London or New York Stock Exchange, they would automatically turn that low risk portfolio into a high risk portfolio with the currency risk between their domestic currency and the currency their investments portfolio is based in.
Generally we would expect the traditional asset management industry to step into this void and offer investors foreign mutual funds that are what is known as ‘currency hedged’. When an investment is currency hedged the manager takes away the risk of currency exposure by purchasing futures in the domestic currency.
So, in a currency hedged fund where a portfolio of US Dollar based assets rose by 10% then a Singapore based investor might expect to get a 9% return in Singapore Dollars.
The main problem with this is that it is very expensive to currency hedge in a traditional mutual fund. Investors will often pay more for the currency hedge than they will for the total management fees on the mutual fund. Due to the expense and complication of currency hedging in mutual funds the investment will require very large assets under management to justify the cost. This means there are very few to choose from and these tend to only be offered by larger managers or domestic funds that may not have the best performance. Where a US investor may expect to have over 50,000 US Equity investment funds to choose from an investor in Asia may only have the choice of 4 or 5 US Equity funds that have currency hedging.
However, this problem can be solved by a new Fintech revolution sweeping through the global assets management industry. There are a host of new alternative structures that can replicate the investor experience of a traditional mutual fund but do it at a massively discounted price.
These new Fintech investments are based on structures like Actively Managed Certificates. A traditional Mutual Fund or Exchange Traded Fund can take up to 2 years to be approved and the set up costs may be as high as $1 million. With the drive to reduce fees in the industry a typical mutual fund or ETF may have to have upwards of $50 million invested just to break even. Currency hedging greatly increases the risk exposure and cost of a fund further compiling the cost and time to market problems.
With structures like Actively Managed Certificates a portfolio of investments can be taken to market with just a few million dollars in invested assets and importantly currency hedging can be quickly and cost effectively added to the structure.
This can allow small pools of investors or even just single wealthy individuals to have their own tailor made bespoke investment strategies that can be adjusted to seek their risk and currency preferences. If fully implemented, new Fintech based solutions can put world-wide investors on an even par with the kind of investment choice investors in large markets like the USA would expect to get and this can help to bring the same kind of revolution to the investment world that Amazon is bringing to the retail world.
Currently Farringdon Asset Management is actively involved in this process with two investment strategies of our own designed to exploit some of the opportunities presented by Fintech.
I hope you enjoyed reading this post.
Kuala Lumpur : Malaysia