Reforms in pension schemes in Asia, along with demand from global money managers, are fueling the growth of the region's bond markets.
"The trend toward defined contribution member choice pension funds in Asia, as it develops, will increase the demand for lower risk cash and bond products," said Nicholas Rogers with Schroder Investment Management (Hong Kong) Ltd.
Hong Kong is in the midst of creating a mandatory, defined contribution pension plan, the Mandatory Provident Fund. Under the MPF, companies at first are likely to offer employees a series of "life cycle" unit trusts by managers such as Schroder.
And in Singapore, the government last fall changed the investment rules in its mandatory savings plan, the S$85 billion (U.S.$52 billion) Central Provident Fund.
In the past, workers could put 100% of savings over S$60,000 in a variety of investments, from unit trusts to stocks to gold. Now, with the government encouraging long-term savings for retirement, that amount has been cut. Workers can invest only 50% of their extra savings directly in the local stock market.
Bond markets should perk up because of the emphasis on savings for retirement, observers said. "The life cycle concept suggests that members should be moving their balances toward lower-risk products" such as bonds, said Mr. Rogers, who is director of marketing, defined contribution and MPF at Schroder.
At present, the bond market in Asia outside of Japan is very small, observers said.
But the debt markets grew dramatically in 1999. Excluding Japan and Australia, issuance of Asian debt totaled more than $7.8 billion, according to data from CapitalDATA/CommScan in New York. That's up more than 73% from the $4.5 billion issued in 1997.
And the rebound last year came after debt markets in Asia staggered through 1998, when the total issue of bonds reached only $1.3 billion.
The region's sell side also is developing, money managers said, and governments are creating benchmarks.
Bond markets in Asia are becoming more important in the wake of the region's financial crisis, observers said. In the past, governments and corporations often have financed projects through loans, borrowing heavily from banks.
But this is changing. In the wake of the Asian contagion that spread across the region after the Thai government devalued its currency in 1997, Asian governments' finances have deteriorated, said Mr. Rogers. Tax receipts declined. "This implies a growing need for governments in the region to tap local bond markets."
Pension funds and government authorities across Asia often are required legally to own a percent of assets in local-currency denominated investments. Traditionally, they have opted for equities.
But after the wild swings of stock markets in the region over the past few years, the more stable bonds are attracting the interest of large institutional investors.
Fund managers trying to sell unit trusts, which are similar to mutual funds, are betting some of the demand from the employees will be in fixed income. The MPF "is good for the development of local bond markets," Mr. Rogers said.
Defined benefit pension plans cover about 1 million workers in Hong Kong. More than 2 million workers have no pension other than a small government payment.
The MPF, which companies must have up and running by December, requires employers and employees each to make contributions of 5% of salaries to investment funds.
And pension funds and money managers are looking to fixed-income investments to diversify their portfolios, money managers and pension fund executives said.
For example, a few regional defined benefit pension funds are moving away from traditional balanced mandates and hiring specialist managers.
In some cases, investing with fixed-income managers to run a local currency bond portfolio is part of that transition.
Local currency manager
Hong Kong's Mass Transit Railway Corp.'s Retirement Scheme is slated to hire its first local currency fixed-income manager this month. The HK$4 billion (U.S.$513 million) plan is close to hiring a fixed-income manager to run about 15% of the fund, with the mandate set in Hong Kong dollars, said Keith Yuen, deputy treasurer.
The fund has an asset allocation weighting of 60% to equities and 40% to fixed income.
The move will be the finishing touch of the fund's two-year overhaul of its asset allocation and managers. In the process, the defined benefit fund dropped its roster of balanced managers and added specialist managers.
One reason the mandate is in local currency is to protect against salary inflation, Mr. Yuen said.
Salaries have increased dramatically in Hong Kong since the early 1980s, compounding annually at a rate of 11% from 1983 to 1998, said Mr. Rogers at Schroder.
Some money managers see the market developing.
"Across the board, governments are coming to the markets to raise funds," said Alex K.G. Ng, chief investment office with ABN AMRO Asset Management (Asia) Ltd. in Hong Kong. "Concurrently, as pension markets develop, there's demand for long-term assets."