Many of the world’s largest fund managers are facing something of a dilemma when it comes to research payments.
As European branches embrace the separation of commission and research payments under the Market In Financial Instruments Directive II, companies are having to decide whether to take a global view or have a separate policy governing Asia.
In the last issue of The TRADE Asia, Shaun Bramham, chief executive officer of Instinet Asia, said if you are an international fund manager it’s simply too complex to have different buying processes for different regions.
However, the Asia Securities Industry & Financial Markets Association told us that there may well be a special case for Asian operations, according to its buy-side members.
This issue, The TRADE Asia asked Allianz Global Investors – which boasts some Ä413 billion in assets under management globally – where its current thinking lies in the region.
Pan Yu Ming joined Allianz fifteen years ago, departing very briefly in 2010 before returning two and half years ago to look after Total Return Asian Equity strategy.
As a senior fund manager he oversees all investment decisions, stock selection and importantly research spend.
He says he agrees that Asia is a slightly different beast when it comes to research predominantly because of the much-discussed lack of availability of small and mid-cap research, but says he acknowledges that there is a need for transparency.
He explains: “In Asia, this is a work in progress but [within Allianz] we are looking to be more stringent from a compliance perspective. We try to unbundle commissions and if we want to pay for research, we ask the execution broker to write the cheque.”
However, Yu Ming says while broker payments for meeting arrangements have been frowned upon by some, he says that they are a necessary function of the research process in Asia.
He says: “I accept that going to a conference has nothing to do with research, but it is hard in Asia. We don’t have time to meet each and every company. A more effective way is for a company to do a big group luncheon and all of the interested investors can attend.
“From the company’s perspective, this is more efficient and more helpful and this should be allowed. When a broker from Morgan Stanley or Goldman Sachs arranges a meeting with investors in a lunch format, I think that is fine.”
Globalised trading approach
Like Allianz, other global players such as JP Morgan Asset Management and BlackRock have adopted a global approach to trading, trying to adopt the highest-known standard to compliance and adopting it in all markets.
However, some trading teams have found that this can restrict their discretion and lead to decisions, which may not always be in the best interests of the client.
Yu Ming says he is free of such corporate restrictions and enjoys a two way relationship with his dealing team.
He explains: “Wherever possible, I try to be specific about my trading requirements, but I look to the traders to use their discretion on topics like market liquidity, market impact, etc. After all, they are in the best position to judge.
“As a fund manager, if you have a strong view or you give specific guidance, of course you let the traders know, but if you don’t have a view, then leave it to the traders. They are usually very proactive and know exactly how and when to execute.”
The Allianz manager says he doesn’t believe that fund managers should get involved in trading conversations on a regular basis.
He says: “Traders have an edge on the flow side. They talk to the market, the people and the brokers and they get a sense as to where the flow is. If we have a chunky order, they know where to go.”
Like so many of its rivals, Allianz is responding to increased demand from institutional investors for total return products, which deliver a predictable return in all markets.
For Allianz, this means the introduction of some long/short strategies in Asia and the use of derivative positions to hedge against potential losses.
Yu Ming says, in his case, these products will be developed from the existing long only product and will target those investors who are looking for an element of protection in periods of market volatility.
There will also be a range of blended equity/fixed income products, which aim to deliver a predictable return, also targeted to the outcome-orientated investor.