Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
AMP Capital counts down to blast-off in China
(Pictured: Stephen Dunne)
By Greg Bright
Australian financial services firms have generally not travelled well. Of the banks, NAB lost a lot of money trying to expand in both the UK and US. Westpac never really became the bank of the Western Pacific as Pieter Huveneers* designed the name to be. ANZ has slowly gathered some presence in Asia, but it’s the stay-at-home Commonwealth Bank that has prospered most in the past 15-20 years.
The fifth pillar of Australia’s biggest financial institutions, AMP, which has adopted a ‘softly softly’ approach to expansion largely concentrated on the Asian region, appears now to be close to blast-off in China. The funds management arm, AMP Capital, last year cemented a deal with China Life for a joint venture funds management company to roll out investment products in mainland China. Its first fund raising, in January, was a great success. But it has taken some time.
Stephen Dunne, the CEO of AMP Capital, divides the region from his perspective into three: Australia, Japan and China. Australia is home, Japan is where the money is and China is where the money will be.
AMP Capital has capitalized well on the Japanese pensions and managed funds market, which is still about twice the size of the Australian market but not growing as fast, or much at all. China, on the other hand, is less than half the size of the Australian market, depending on which numbers you look at, but has the potential for massive growth.
Dunne says: “Our Beijing representative office was set up in 1997 as part of the broader AMP group, but became a focus for the investment firm [AMP Capital] in 2004, when we looked at their pensions market. We saw it as an opportunity for the investment firm to get involved as the reforms were started and enterprise annuities were subsequently rolled out. It’s been slow to develop but we’re thinking long term. We think that we can add quite a lot of value, from Australia, because the Chinese reforms are similar to replicating the Australian system… They have adopted the same three pillars of social security, corporate pensions and voluntary, individual pensions.”
Its experience in the region taught AMP Capital that finding the right partner was critical to success in China. Then, says Dunne, the firm needed the patience to build the relationship: “We met with many firms over the first 10 years. We found we had a similar business culture to China Life.” Tellingly, the deal with AMP Capital is China Life’s only joint venture with a foreign entity in mainland China.
AMP Capital is starting its Chinese j.v. product range with fixed interest strategies, the first money market fund raising A$2.2 billion from both institutional and retail investors, and will move into equities and other asset classes in time.
Dunne says that the Chinese ‘mutual fund’ market is expected to total about A$1.7 trillion by 2017, putting it at roughly the same size as Australia’s superannuation market currently. “So, it’s quite a big market already,” he says.
As you’d expect, given the country’s population, it’s not all about the market size. Access and efficient distribution are crucial for the product manufacturers. The top four Chinese banks, all Government owned, have dominated mutual fund distribution to date.
Although its asset management arm is more than twice the size of AMP’s, China Life’s growth over recent years has mainly been because of the sale of life insurance policies, which, of course, is also AMP’s heritage. AMP’s old life agents have transitioned to being financial planners, or largely exited the business, over the past 20 years, with the evolution of the Australian superannuation industry. They currently number about 4,000. China Life, Dunne says, has about 700,000 life agents. And it was only in 2013 that that sales force has been able also to sell mutual funds.
“They have been keen to see how we achieved the transition from life agent to financial advisor with our people,” he says. “We hope we can share our experience with them on that front.”
When AMP Capital started its serious negotiations with China Life about the j.v. a number of years ago AMP had about A$100 billion under management while China Life had about $80 billion. At the time of executing the contract between the two funds management groups late last year, China Life had $350 billion and AMP $140 billion. China is like that.
AMP Capital owns only 15 per cent of China Life AMP Asset Management Co Ltd but will always remain the second largest shareholder in the new company, Dunne says. He says the venture itself has enormous potential for growth. And there are other opportunities for AMP Capital to engage the j.v. on a range of its international strategies as well as to assist in expanding the product set or with new arrangements.
“There’s an opportunity to create a significant business in China,” Dunne says. “There’s also the opportunity to deepen our insight about the Chinese investment market for the benefit of all our other clients.” AMP Capital, for instance, already invests some money on behalf of China Life into infrastructure debt.
While it doesn’t have many of its 240 investment professionals in China as yet, AMP Capital does have about 20 per cent of them outside of Australia in Europe, North America, the Middle East and elsewhere. AMP Capital has about 1,000 staff all up.
As previously announced, the AMP organisation has been going through a restructure, which will probably result in some streamlining and net loss of jobs. Dunne says that the number of staff today at AMP Capital is roughly the same as a few years ago – immediately after the GFC – and new employment opportunities are also emerging as the organisation expands internationally.
But the “tailwinds” from the secular bull investment market that the big fund managers have enjoyed for about 20 years are gone.
The interesting question for AMP Capital is what sort of organization emerges from the restructure. Dunne believes, for instance, that funds management will not be about selling ‘product’ in the future, but rather providing the managers’ intellectual capital in various ways.
“If you look at us in five years’ time,” he says, “I think that much of our FUM will be based on investment goals and outcomes rather than benchmarks.”
In the corporate bond fund, for instance, he says, AMP Capital is not focused on the traditional indices but, rather, to deliver a regular income for the investors. That’s what they want.
“Fund managers, or rather investment managers, must get closer to their clients and share and deliver investment insights to best enable clients to achieve their investment goals,” Dunne says.
*In 1968 Pieter Huveneers set up a design company in Australia. His most famous designs were for the launches of Australia Post and Telecom in the 1970s. He also came up with the name ‘Westpac’ for the launch of that bank in 1981 after the Bank of NSW had merged with the Commercial Bank of Australia. Huveneers, a charming Dutchman, was rumoured to have been paid $1 million for the name and three-frankfurters’ design. ‘Westpac’ is short for ‘Western Pacific’, which is where the newly merged bank inexplicably had its sights.
