Institutions supply the big money

Chris Chapel

PRIVATE banking has a higher profile but institutional money provides most of the business for asset managers around the world.

Citibank Global Asset Management (CGAM) has US$73 billion (HK$569.3 billion) under management, of which $45 billion is institutional.

Its Hong Kong office was set up in 1979 and caters almost exclusively to institutions.

There are 22 staff in the Hong Kong office including five investment managers, serving clients based in Hong Kong, Taiwan and China and responsible for stock selection on orders sourced in other parts of the Citibank structure.

'We have sourced in excess of $2 billion from Hong Kong,' Andrew Au, CGAM managing director, said.

'Of course, the amount actually invested in Hong Kong changes. If a Hong Kong client wants to invest in the US, we send it over and New York will do the same for its Asian investment. It is very much a global business.' So, how does a company manage billions of institutional dollars? Mr Au said: 'We combine a top-down with a bottom-up approach. What it really means is we are a top-down house. We first look at the global economic environment, then the regional economic climate, then currency factors. We believe economies will drive markets in the long term.

'We look at interest rates, equity performance and then we come up with a global matrix of our preferred asset class and geographic split.' Forecasts are then made on a rolling basis three and 12 months ahead.

'Globally, the core of the process is the International Asset Management Committee [IAMC]. Its members are the most senior investment managers around the world. They meet quarterly, normally in London, sometimes in Hong Kong,' he said.

The IAMC evaluates the economic and sectoral factors and develops its matrix.

Before this stage, each region will have had an investment committee meeting to develop a regional view to take to the London meeting.

At the main meeting, the IAMC, comprising the global chief investment officer and the regional senior investment officers discuss - sometimes for days - the outlook for the global and regional economies.

'They discuss the hell out of it and they prepare guidelines as to what their preferred asset class is, what their preferred geographic split is and come up with a matrix.' If any strong minority view survives these negotiations, it is documented. Then the senior investment officers return to their respective bases and formulate asset allocation strategies based on the agreed global view plus regional input.

'We try to combine a global view with a regional input and take into consideration the needs of the client. For example, a piece of news that comes in Hong Kong could be interpreted positively both in London and Hong Kong. Both might say, 'Overweight Hong Kong' but the extent might differ between managers in each place,' he said.

'Managers in Hong Kong will know what their clients are looking for in the long term, for example if it is a pension fund. That is why we have delegated responsibility for asset allocation to Hong Kong - to take the local environment into consideration and to create accountability to the client on the ground without sacrificing the totality of input from CGAM on a global basis.' In the event of a dispute between senior investment officers about the direction of the United States' economy, the global chief investment officer has the final say.

Performance is a key issue when institutions go shopping for an asset manager.

To give prospective clients an idea of the kind of performance they can expect, asset managers such as CGAM send them performance records of funds they have managed with a similar risk and reward profile.

'When they are looking for investment managers, institutions send out requests for proposals. Managers submit their historical performance on similar portfolios as part of the proposals,' Mr Au said.

'Let's say the portfolio is to be invested only in Hong Kong. We would submit a benchmark as well as our historical performance. It is common in the institutional market.'