Steve Johnson
Financial Times
The city state of Singapore punches well above its weight in the world of investment. Between them Temasek Holdings and the Government of Singapore Investment Corporation, the tiny nation’s twin sovereign wealth funds, manage an estimated $400bn (£245bn, €280bn) of assets.
But Singapore is not resting on its laurels; it is about to wade into the congested European asset management industry as part of a plan to raise its assets under management higher still.
Fullerton Fund Management, the funds offshoot of Temasek, currently manages just $2.3bn of external money, in addition to the assets of its parent.
But Fullerton hopes to bolster this tally by launching its first European Ucits funds via the migration of two existing vehicles from the Cayman Islands to Luxembourg before the end of the year.
Gerald Lee, chief executive and founder of Fullerton, believes the move is essential to crack the European market, which currently accounts for just 5 per cent of its customer base.
“We have funds registered in Singapore as well as in the Cayman Islands but there’s just no way we can penetrate the [European] market, if the fund structure is not right. We realise that if we don’t put funds on a Ucits platform we can be marketing here every day, but we won’t get a single cent.”
Fullerton’s initial offerings will reflect its expertise in Asian securities, but with an interesting twist. One fund, Fullerton Asian Equities, is a straightforward relative return product. But the other, Fullerton Absolute Return Asian Equities, is a market timing vehicle which allows the manager significant freedom to switch between equities and cash in anticipation of market rallies and slumps.
Mr Lee is adamant that his managers are able to time the markets in this manner, in spite of the fact that many of the world’s most successful equity managers say such timing abilities are beyond them.
“The whole idea is to take away enslavement to the index. We discover that the moment you do that, actually equity managers do have a very great sense of market timing, contrary to popular belief,” says Mr Lee, who was head of fixed income sales at SBC Warburg Singapore and deputy chief investment officer at Deutsche Asset Management Singapore prior to joining Temasek in 1999.
“I come from a fixed income background, I spent my years in a business as a fixed income manager, so I always found it very perplexing that equity managers claim that they don’t know how to time the market.
“Here I was trading bonds and managing bond portfolios knowing that, actually, it’s not a very difficult call. You don’t need to be somebody with high IQ, you just need to have a very good sense of what is happening.
“You always know when the market is overbought and you know when the market is oversold. Equity managers are capable of market timing and we want to put that to good use.”
Even armed with this information, picking turning points is notoriously hard. During the latter stages of the 1990s bull market, many managers were all too aware that a host of technology, media and telecoms stocks were wildly overvalued, but those managers brave enough to exit these sectors suffered as the TMT bubble continued to inflate, and in many cases lost their jobs as a result.
Mr Lee is aware of the difficulties, but believes the answer is to mandate absolute return managers to beat deposit rates by 5 to 7 percentage points a year over the cycle.
They are likely to exceed this in a bull market, even if they have not participated fully in the rally, giving them the freedom to bail out without being fearful as to their future employment prospects.
“The absolute return guy actually knows how to take money away from the table when things are overheated,” argues Mr Lee. “Where he really adds value is when the market starts falling apart and he has everything very nicely in cash.”
According to Mr Lee, Fullerton first trialled market timing with some of its equity managers five years ago, and the experience has been “very pleasant”.
However, the experience of the Fullerton Absolute Return Asian Equities fund since launch in 2007 has been somewhat less pleasant. During 2008 it lost 37 per cent, against a 52 per cent drop in its underlying Asia ex-Japan index.
Mr Lee largely blames investors for this state of affairs arguing that, with the fund launched during a bull market, investors were unwilling to accept Fullerton’s recommendation that the “neutral” equity weighting should have been 30-50 per cent and instead insisted neutral should be 70 per cent.
“They wanted to have their cake and eat it,” he says.
Fullerton also has plans to go after US investors, but these are unlikely to be firmed up until next year at the earliest, when it is able to start learning some of the lessons from its European push.
In spite of the imminent migration of two of Fullerton’s vehicles from the Caymans, Mr Lee is reluctant to sound the death knell for the Caribbean offshore financial centre, which some see as a potential loser from moves by the US and Europe to stem tax avoidance and tighten regulation of the financial system.
“There is a critical mass of excellence in the Caymans, in terms of people knowing the legal and administrative aspect, so I think they continue to have the advantage,” he says.
Yet, following budget changes in February which improved the tax treatment of funds in Fullerton’s home market, Mr Lee adds: “I can see that more and more hedge funds domiciled in Singapore may not find it necessary to incorporate their funds in Cayman as before.”
Further change may be afoot for Fullerton, however. Last month, Temasek said it would be prepared to list some of its biggest holdings, such as port operator PSA and Singapore Power, adding that even Fullerton itself could be suited to a float.
http://www.ft.com/cms/s/0/42d49b3c-9979-11de-ab8c-00144feabdc0.html?nclick_check=1