Nikko AM happy to have Asia at its core

Holding court at his office in a typical high-rise on the main business drag of Hong Kong’s Central district, American expatriate Blair Pickerell, regional boss of Japanese fund house Nikko Asset Management, feels in a kind of limbo.

His clients are sitting on a pile of cash. They are being squeezed out of the market by unfolding events in two continents. Nervous about the developing story in Italy, Greece and Spain, they are also sceptical of whether the imminent handover in China will kick-start a public spending programme to spark a new Asian growth cycle, which they know will happen eventually.

“China is already making these decisions now. An agreement has been signed to build new subway lines in 25 cities and the Asian version of quantitative easing is already happening,” says Mr Pickerell. “There is a general commitment to spending large amounts on infrastructure in China to stimulate the economy.”

Yet there are no complaints for Mr Pickerell. Even if some are wary of commitment, larger investors maintain strong allocations to Asia, despite local difficulties such as periodic territorial disputes between Japan and China, which can lead to changing export patterns between the countries.

“For many, we are talking about marginal shifts in weighting,” he says. “Even if things are not looking up in Asia, money will still flow into Asian assets. The economy here still feels relatively strong compared to Europe, North America and other parts of the world.”

Rather than deciding whether to invest in developed or developing markets, a tougher decision can be how to allocate between equity and fixed income, believes Mr Pickerell. “A lot of people are mulling that one over and wondering what to do next.”

Currently, he is seeing clients favouring fixed income and cash over stocks. “If there is a move back towards equity, then all Asian markets will benefit.”

But for those with a more tactical mindset, there is a lot of head-scratching going on. “Investors are more openly bewildered now than normal,” confesses Mr Pickerell. “Nobody knows what is going to happen.”

BUILDING UP BONDS

With Asian investors undoubtedly favouring fixed income, Nikko has taken the opportunity to boost its bonds hub in Singapore, after the integration of an investment unit previously owned by DBS.

“Asian economies are still stronger than Western counterparts and there is a feeling that Asian currencies are backed by stronger fundamentals, so demand for Asian fixed income has increased, from clients both here and in other parts of the world,” says Mr Pickerell.

Although fixed income is the most popular product currently, he believes the fast flows into this asset class show that many investors are not aware of the associated risks. “Investors just see a higher yield rather than putting money in the bank,” he warns. “But they don’t realise that a three-year bond fund is very different to a three-year bond. There is the danger of a big capital loss.”

To counter these risks, Nikko, which has $166bn (€129bn) in assets under management, tries to invest in safer and short-term debt instruments.

“If people are chasing yield, those funds with longer maturities and higher risk can come back to haunt them,” adds Mr Pickerell.

Eventually, he expects Asian fixed income, driven by this increase in demand coupled with fast-improving credit ratings, to become its own distinct asset classs, in the same way as emerging market debt has developed into a “must-have” allocation. “But investors need to ask themselves: ‘Which houses have strong credit teams?’ You don’t want to be holding the wrong bond when things turn nasty.”

Despite this relatively strong fixed income trend, managed assets have been drifting slightly downwards, mainly due to uncertainty over Asian equities. But this is no reason to panic, far from it, believes Mr Pickerell.

“Some of us are blessed to be in this part of the world, where demographics are more in our favour than elsewhere,” he calculates. “Asia is creating a middle class with more wealth and more people.”

The key barriers to the investment industry’s growth, he believes, are often built by regulators rather than prevailing economic conditions. “Regulatory pressures are making it somewhat more difficult to sell funds,” says Mr Pickerell.

“Rules about knowing your customer, money laundering and risk-profiling, which were brought in after mis-selling scandals in a number of countries, have made it a much longer and more arduous process to buy a fund than it used to be.”

One of the by-products of the US Fatca regulations, now widely seen as backfiring on the American authorities, is that most fund houses and private banks are now refusing to deal with American clients, for fear of being penalised. The compliance procedures, says Mr Pickerell, are so onerous, that the majority of investment groups prefer to avoid any risk rather than be caught transgressing the small print.

“Even American banks won’t deal with American clients,” he says. “The banking industry is going through turmoil. In this environment, it is more difficult to sell products than it used to be. This is a potentially damaging trend which the industry has not focused on enough.”

When it comes to this key area of distribution, essentially the life-blood of a regional group like Nikko, Mr Pickerell cannot hide his annoyance with the authorities about picking on already tightly-regulated mutual funds, rather than the true villains of the piece in Asia.

“When it all blew up, it was structured notes, such as the Lehman minibonds, not mutual funds which caused all the problems. But mutual funds were tarred with the same brush. We have done a poor job as an industry in dealing with this.”

When people lost money in 2008, they were being sold inappropriate structured products, says Mr Pickerell, something which should have ultimately worked to the benefit of big-brand investment houses.

“There should have been a flight to quality, to those mutual funds with trustees and thick prospectuses. But rather than this, mutual funds ended up with the same restrictions and our own industry’s growth was slowed slightly by these rules.”

Although Nikko is a major player in the exchange traded fund space, particularly in its Japanese home market, ETFs are not really an area favoured by Mr Pickerell for huge Asian growth, mainly because there is little fee income for private banks and other distributors. “In Asia, there is little doubt that funds are still sold and not bought. Clients are waiting for a salesman to call them with an idea,” he says. “People have been predicting the rise of the no-load fund industry for the last 27 years, and it has not yet happened.”

What could however boost Nikko’s fortunes is an Asian appetite for specific, specialist niche products, which does not exist to the same extent in Europe and the US. “In Asia, broad balanced funds do not sell very much. People prefer very specific investment decisions,” says Mr Pickerell.

Many global players, he believes, are pulling back from the Asian market, with both ING and Deutsche putting their regional franchises up for sale. “Very few European banks are now at the table. They need to manage their balance sheet and meet Basel III requirements, which means either raising new equity capital or selling off their non-core assets. We are not affected by those challenges. This is a core business for us, so it is relatively smooth sailing.”

CV

Blair Pickerell

2011 Blair Pickerell appointed head of Asia and global chief marketing officer for the Nikko Asset Management Group. Based in Hong Kong, Mr Pickerell is responsible for developing and overseeing Nikko AM’s businesses in the Asian region and implementing its branding strategy worldwide

2007 Joined Morgan Stanley Investment Management and served for three years as chief executive, Asia

2003 Joined HSBC Asset Management, serving as CEO, Asia Pacific

1999 Appointed chairman of JF Funds. He also served for four years as the managing director of Jardine Pacific Ltd and for two years as development director of the Mandarin Oriental Hotel Group

Education: BA (with Honours and with Distinction) and MA from Stanford University and an MBA from Harvard Business School

Blair Pickerel, Nikko AM