Fixed income assets managed by investors in Asia, excluding Japan, should reach $1 trillion within two years, according to a top consultant.
Tim Sangston, a managing director at Greenwich Associates, which publishes an annual report on the Asian fund management industry, says that as fixed income as an asset class in Asia becomes more professional and sophisticated, "there is a very good chance" that funds under management will reach the magical $1 trillion mark by 2007.
Even despite the recent volatility, Sangston says that conditions should be favourable for investing in fixed income instruments. "Many Asian economies, especially China and India, are growing at robust rates but in a controlled way." He reckons, therefore, that institutional investors not just in the region but also in Europe and the US will further "look to Asia as a viable investment. If you can stomach the daily volatility then there are lots of opportunities there."
At the same time, Sangston adds, fixed income asset management in Asia is becoming a more specialized business. The asset class has developed rapidly and now encompasses a variety of securities, not just straightforward government bonds. In addition, institutional investors have been on hiring sprees recruiting not just traditional portfolio managers but also credit analysts, credit derivatives experts, structured finance specialists and so on.
Greenwich published its last report on the Asian fund management industry in September. At the time, the report, which polls 524 investors in Asia, excluding Japan, found that more than half of the respondents were planning to hire fixed income specialists over the coming year. It also stated that assets managed by these investors totaled about $676 billion. The firm will begin research on its next report in June.
The report also ranks the performance of sell-side dealers and research analysts. Sangston says that the dealer community can be divided into two tiers. The first tier comprises the commercial banks, such as HSBC, Citigroup and JP Morgan Chase. These banks stand out because of their ability to provide international and local products. They also tend to have a local presence in many countries in the region. The other tier, says Sangston, includes mostly the global investment banks "that are very good at non-domestic products," but don't have the local reach.
In its last report, Greenwich found that local currency bonds accounted for more than half of regional fixed income trading volume over the previous 12 months. The demand for local currency bonds will probably remain strong, especially following the launch of Asian Bond Fund 2, the initiative launched by the region's central banks to encourage the development of the domestic fixed income markets.