Strong inward flows, he said, came from Japan and Korea equities and in the second half, from China
“The take-away is that we had a pretty good year, given the first half was horrible and the second half not bad.
“We’re a value house, so we had multiple years of pain in a zero interest rate environment. Investors simply piled into equities — quality companies that pay high dividends — as if they were bonds, and disregarded all else.”
The last nine months that trend has been reversing, he added. “We’re seeing stretched valuations on quasi-bonds such as utilities.”
Recently the firm made several senior hires. Key among them was last November’s appointment of Virginie Maisonneuve, who was lured over from Pimco to serve as chief investment officer.
However, Au King-lun, the firm’s former Hong Kong CEO, left in December for Value Partners.
M&A?
The current M&A activity among global asset management firms he describes as “defensive plays”.
“With those transactions, Aberdeen/Standard Life came at the same time as the Scottish referendum announcement, so you could see it as a quasi-Brexit play. Henderson and Janus do not have too much overlap, but three of those four firms were experiencing big outflows prior to the announcements.
“I understand the need to build scale but that need is more prevalent in the US or Europe due to the impact of lower fees and passive product inflows. Asset management firms have really struggled in the US and to an extent in Europe. [Parent group] Prudential does not need to do anything like that. I don’t see us in defensive mode.”
Fee pressure
Strapp said fee pressure, driven by capital flowing from active to passive, is coming mainly from Korea’s institutional and retail investors.
But he believes there is not a lot of room for fee compression.
“We are happy with a tilt toward performance fees – lower base fees and a performance fee kicker for institutional clients. In the retail space there is not an aggressive push from regulators in Asia for lower fees.”
The firm is building smart beta and quant products, but there are no plans to build a suite of passive products, he added.
An abrupt take off in ETF products in Asia, which would put stronger fee pressure on asset managers and speed the migration to the fee-based wealth management model, would result in some disasters, he believes.
“Here mutual fund penetration is still single digits versus the percentage of households, so there is a relatively uninitiated savings mentality. In Asia, investors are also more short-term oriented so there is higher churn. If you take out any form of load and hence opportunity for any customer with $50k to invest to have a conversation with a person before investing, then you worry about very rational outcomes where clients invest in very high risk products.
“We need to migrate in an evolutionary fashion, not through a pricing revolution. Maybe regulators are thinking that way. We’ve seen action on the fitness and purpose of the product, but very little action on the pricing component. Maybe in five years there will be a focus on pricing outcomes.”
