interview

1. Published by
MARCH 2015
Examining the evolving asset allocation strategies that Asian based institutional investment groups are adopting
to navigate the market challenges they face.
INSTITUTIONAL
INVESTMENT STRATEGIES,
ASIA
Media Partners

2. 2
CONTENTS
SECTION 1
ADAPTING TO PRESENT MARKET CONDITIONS
1.1 INTERVIEW 5
How are Korean institutional investors adapting their investment strategies
given the present market conditions and regulatory environment?
Interviewer:
• Chido Tagarira, Senior Publisher, Clear Path Analysis
Interviewee:
• Nayoung Kim, Former Fixed Income Senior Professional, Samsung Fire & Marine
Insurance Co.
1.2 INTERVIEW 7
Considering the changes to Asian based private bankers’ approach to investing
Interviewer:
• Chido Tagarira, Senior Publisher, Clear Path Analysis
Interviewee:
• Eva Law, Founder, Association of Private Bankers, Greater China
1.3 INTERVIEW 10
An Indian based life insurer’s perspective on the evolution of investment
strategies
Interviewer:
• Chido Tagarira, Senior Publisher, Clear Path Analysis
Interviewee:
• Ritu Arora, Chief Investment Officer, Canara HSBC Oriental Bank of Commerce Life
Insurance
SECTION 2
THE VALUE OF DIVERSIFICATION
INTERVIEW 13
How can exposure to alternatives enhance investment portfolios and help to
generate consistent returns?
Interviewer:
• Chido Tagarira, Senior Publisher, Clear Path Analysis
Interviewee:
• Siti Rakhmawati, Head of Investment Analyst, PT Telekomunikasi Indonesia
Pension Fund
SECTION 3
THE ASIA REGION FUNDS PASSPORT REGIME
INTERVIEW 16
Expectations for the Asia Region Funds Passport regime
Interviewer:
• Chido Tagarira, Senior Publisher, Clear Path Analysis
Interviewee:
• Manuel Huberto B. Gaite, Commissioner, Securities and Exchange Commission,
Philippines
Institutional Investment Strategies, Asia
Manuel Huberto B. Gaite
Commissioner, Securities
and Exchange Commission,
Philippines
Siti Rakhmawati
Head of Investment
Analyst, PT
Telekomunikasi
Indonesia Pension Fund
Ritu Arora
Chief Investment Officer,
Canara HSBC Oriental
Bank of Commerce Life
Insurance
Eva Law
Founder, Association
of Private Bankers,
Greater China
Nayoung Kim
Former Fixed Income
Senior Professional,
Samsung Fire & Marine
Insurance Co.

3. 3
Chido Tagarira
Senior Publisher
Libby Britcher
Marketing & Operations
Manager
Jim Allen
Senior Digital Producer
Noel Hillmann
Managing Director
& Head of Publishing
Jennifer Menoscal
Marketing Assistant
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4. 4
SECTION 1
ADAPTING TO PRESENT MARKET
CONDITIONS
How are Korean institutional investors adapting their investment strategies given
the present market conditions and regulatory environment?
1.1 INTERVIEW
Considering the changes to Asian based private bankers’ approach to investing
1.2 INTERVIEW
An Indian based life insurer’s perspective on the evolution of investment strategies
1.3 INTERVIEW

5. 5
Chido Tagarira: What economic
factors have had an impact on Korean
institutions’ investment strategies
over the last 3-5 years?
Nayoung Kim: The low yield
environment in Korea has definitely
had an impact on investment
strategies. The economy hasn’t been
growing as rapidly as it had been
throughout the 1980s and 1990s.
Korea has been facing its first
deflationary status and although the
economy has been growing, its growth
has stagnated to 3% levels, hence
its rates have been coming down in
tandem with the slowing growth. The
market isn’t used to this, and fixed
income investors in particular are not
used to this environment, so they are
trying all means possible to pick up
additional yield.
Chido: What strategies are investors
looking at to try and pick up this
additional yield?
Nayoung: More Korean institutional
investors are looking towards foreign
assets and currencies. Their strategies
are largely being driven by fluctuations
in the foreign exchange rates of various
currencies.
For example, in 2014, Chinese
offshore yuan (CNH)-denominated
deposits were a big hit among Korean
institutional investors because there
was a slight temporary misalignment
between the short-term interest rate of
the Korean won (KRW) and CNH. Due
to this, there was a temporary phase
where investing in CNH and converting
it into Korean won helped Korean
investors pick up around 100-200 basis
points of additional yield in terms
of foreign exchange (FX) premium
alone. In addition, the rates of CNH
deposits were obviously higher than
KRW denominated deposits. Therefore,
Korean institutional investors could
enjoy both the high yield to maturity
from the deposit rates, as well as
the additional pick-up that comes
from the divergence between the
foreign exchange rates and the rate
environment of the two countries.
Nowadays, you can’t really find this
anymore because the rate environment
has normalised. Additionally, Korean
papers (KPs) denominated in USD
were a very hot topic among Korean
investors until 2014 as a means of
picking up additional yield without
layering additional credit risk. However,
KP yields have tightened notoriously
and FX premium arising from USD-
KRW swaps are diminishing, so this
is not the case anymore. As a result,
Korean institutional investors are now
looking at emerging market paper that
is denominated in USD and other local
currencies, as well as opportunities that
come from other minute divergences
in the foreign exchange rate
environment.
Korean institutional investors have
become a lot more nimble. If you go
back a decade or so ago, being a fixed
income investor in Korea – especially
as a liability-driven investor with local
currency liabilities in Korea - was
relatively easier because we had higher
yields than other developed countries.
In today’s world, things have shifted
and Korea is on the verge of becoming
an emerging market or developed
country, and it has relatively low yields
because of its stability and the liquidity
both around its local and foreign
currency denominated paper.
The institutional regulatory
environment is focusing more on
the risk-based capital of institutional
investors themselves.
Chido: What types of investments
typically make up the bulk of Korean
institutions’ portfolios?
Nayoung: Given the yield perspective
as well as the nature of the market,
public fixed income and equity takes
up the lion-share of their investment
portfolios. Institutional investors are
also realising that they can’t rely on
public markets alone anymore, and
Korean equities have relatively lower
dividend yields so it is more difficult
to gain a stable income from Korean
equity investments.
More investors are looking at
alternative investments. The National
Pension System (NPS) of Korea is
also looking to diversify into hedge
funds. Other conservative institutional
investors have been looking into the
possibility of investing in private equity
or hedge funds but this is still at a very
nascent stage.
Chido: Do you think that hedge funds
might start to come on the radar for
other institutions based on what
happens with the NPS?
Nayoung: If the NPS does make a
move, it would be a great opportunity
for hedge funds. There would be a
strong marketing push from hedge
funds especially from those who are
operating within Asia or the bigger
global names as NPS would be a
1.1 INTERVIEW
How are Korean institutional investors adapting their investment strategies given
the present market conditions and regulatory environment?
Interviewer Interviewee
Nayoung Kim
Former Fixed Income
Senior Professional,
Samsung Fire & Marine
Insurance Co.
Chido Tagarira
Senior Publisher

6. 6
How are Korean institutional investors adapting their investment strategies given the present market conditions and regulatory
environment?
large chunk of money. The bigger
institutional investors and those that
are more government-orientated
tend to be very conservative, so even
though NPS is looking to include hedge
funds in their asset portfolio, capital
loss is seen as a big failure particularly
for institutions who have a large fixed
income portfolio. So it isn’t going to be
that easy because the nature of hedge
funds is that although you can make a
lot of money, there is also a large risk
attached to it.
The biggest hurdle for these
institutions’ alternative investments
would be whether or not these
institutions would be able to reshape
their risk tolerances. As with equity, or
other investments in other funds which
can result at least in a temporary loss, it
is a question of how, and whether, they
can or should make up for it.
Chido: Has the regulatory
environment played an influential
role in the types of investments
that investors now allocate to? Are
there any specific regulations for
institutional investors in Korea that
you are bound by?
Nayoung: Since 2008, Korea has been
fairly aligned with the global regulatory
environment. Similarly to most other
countries, they have tightened the
capital requirements for financial
institutions and asset managing
institutions following the crisis.
It is becoming much more difficult
for institutional investors to make
money in Korea because we are in
a low yield environment, but our
capital requirements are tighter than
what they used to be in a better yield
environment. This is the reason why
people are looking at more niche
markets and alternative assets. This
trend will continue but might take
more time to see whether or not
Korean institutional investors would
actively invest in such products
because most institutions have had to
deal with losses – big or small - post
2008. Korean institutions have had
some exposure
to derivatives and
structured products,
some of which
culminated in a loss
during the 2008
crisis. As a result,
Korean institutional
investors are more
sensitive to the
global environment,
even though there is
a growing consensus
that they have no choice but to take
more risk in the current investment
environment.
Chido: What strategies do Korean
investors consider when putting
together their de-risking plans?
Nayoung: It depends largely on the
investment mandate of the investor.
For the conservative, liability-driven
investor, there is little room to further
de-risk because the bulk of their assets
are already in relatively safe Korean
won-denominated local bonds issued
by state-owned agencies or the Korean
government. Therefore, ironically,
these investors will be pressured to
take more risk in a tighter regulatory
environment.
As for the alpha chasers, managing
currency risk has always been
important, especially if you’re
managing a KRW-denominated book
and are actively searching for yields
in emerging market paper. I also see
concerns surrounding the whereabouts
of the Bank of Korea rates in light of a
potential U.S. fed rate increase, since
it’s likely to impact both the net asset
value of local bond portfolios and the
FX premium of overseas investments
portfolios.
Chido: Thank you for taking the time
to share your thoughts on this.
“they have no choice but to
take more risk in the current
investment environment. ”

7. 7
Chido Tagarira: What does the
Association of Private Bankers and
the Association of Family Offices do?
Eva Law: The Association of Private
Bankers (APB) is a professional body
which was set up 5 years ago to gather
private bankers in our region. We
later ventured into China. The people
there have mixed experience and are
relatively more aggressive than those
in other markets.
We have been approached by many
professionals and intermediaries
serving the ultra-affluent to join the
association. We even receive requests
to join from asset owners, and have
gained fast-paced growth with wide
reaching capabilities due to the
ambassadors’ efforts. As a result, we
have been under pressure to create
additional memberships for those
who are not private bankers but are
servicing very wealthy customers such
as those from auction houses, real
estate, investment banks, commercial
banks or private equity funds.
Presently, the APB is made up of
around 60-70% private bankers, and
the rest come from other sub sections
that fall within the financial industry
and real asset related industries.
The Association of Family Offices
(AFO) was founded 2 years ago. The
membership here is different to the
APB because all of the members are
family offices covering single family
offices (SFOs), multi-family offices
(MFOs), virtual family offices (VFOs)
and boutiques in Asia. They are all
institutional investors and many have
been established for a few decades.
Some members are newly advanced to
the emerging ultra-wealthy class.
The APB offers professional training
and organises activities to foster
knowledge exchange. It also promotes
long-term industry development,
supports collaboration among
practitioners, and delivers a range of
professional services to wealth owners.
The AFO offers a range of consultancy
services, sources investment projects
and organises activities to facilitate
collaboration and co-investment
among the prestige circle.
Therefore, I will be speaking mostly
from the private bankers and family
offices’ perspective.
Chido: What economic factors have
had an impact on these institutions
over the last 3 years?
Eva: The important factor is the
extremely loose monetary policy of
the major governments with which
they were injecting ample liquidity into
the market, as well as the recent turn
towards the path of re-domiciliation.
There has been unprecedented
intervention by central banks to keep
the interest rate near zero in major
economies like Europe, Japan, UK, U.S.
and China, even though the rate has
been coming down over the past few
years. As asian wealth owners allocate
more into the traditional fixed income
and bond vehicles, this has posed
many challenges.
Many private bankers are receiving
a lot of of feedback as they structure
solutions. When the rates come down,
it is not easy to find real returns, so they
try to use structured solutions. They
use zero-coupon bonds and bundle
it with options for making capital or
return guaranteed, and of course this
is not easy as these vehicles are also
sensitive to the interest rate. This will
continue to have an impact on overall
investment in the banking space in
the coming years. The rates will start
to climb but the rise will increase on a
very gradual basis. Japan and Europe
will still be facing their quantitative
easing, and we expect the yield of high
grade bonds to maintain at a very low
level.
Other factors that are shaping
investment behaviour are the recovery
of the U.S market and the concerns
around the possible hard-landing
of China’s economy. Investors have
tried to diversify against this with
convergent views that drive the natural
flow between these two markets.
Many assets are coming over to the
U.S, though the net in-flow into
China compared to the U.S is still on a
positive trend. However, in comparison
to the continuously increasing trend,
last year was difficult. The figures also
show a slowdown in the economy
which will continue to impact the
market, but I remain positive on the
China economy in the long run.
Chido: What types of investments do
the private bankers and family offices
typically allocate to? Why do you
think these are more favoured?
Eva: The very wealthy customers in Asia
tend to have multiple private bankers
working with them. These private
bankers work for a financial institution
so the bulk or entire portfolio will be
chopped into several smaller portfolios.
In these smaller portfolios, investors
1.2 INTERVIEW
Considering the changes to Asian based private bankers’ approach to investing
Interviewer Interviewee
Eva Law
Founder, Association
of Private Bankers,
Greater China
Chido Tagarira
Senior Publisher

8. 8
Considering the changes to Asian based private bankers’ approach to investing
typically hold traditional core assets
like fixed income securities, bonds, as
well as blue chips on the equity side.
This has been particularly so in the
last few years because of the extreme
market volatility and the natural desire
of people chasing higher rates.
Having reviewed the desk performance
of structured solution units in leading
players, we have noticed a significant
downturn since the bubble, and an
echo bounce thereafter. Investors were
hard-hit by the structured product in
2008/09 but in 2010, the government
also introduced measures tightening
the regulation. Since then, we have
seen that the market is picking up.
In comparison to other players in
the developed market, Asia is less
sophisticated, so you can see a lot
of asset allocation in real estate and
private equity (not private equity
funds but in direct investment mode).
Asians like to venture their investment
into other companies as a minority
stakeholder. In some other cases,
they invest into the listed company’s
share through block trades or getting
preference shares. If they want to take
control, they sometimes acquire some
high growth potential companies.
They bet on their family business,
so they want to take control, and
this is generally what a family office
does when they are acting like an
institutional investor. In these cases,
they go for mergers and acquisitions.
Many Asian wealth owners also have
a special interest in infrastructure and
commodities related projects.
Over the past 18 months, we have
noticed a trend amongs Asian investors
where the richest gained enormous
interest in venture capital investment
because of Jack Ma (founder of
Alibaba)’s great success. They are
regretting missing the opportunities 10
years ago when Jack was desperately
seeking funds. In order to identify
undetected opportunities, many
wealth owners have approached us
to source ICT related venture capital
investments, but
the investment
amount was not
that significant as
they were all well
aware of the risks
embedded with
these investments.
In mid-2014, a lot of
the super wealthy
started to take action.
Decisions have
been made more quickly and more
money has been allocated to the ICT
companies, should they regard them
as diamonds in the rough. Both private
and investment bankers were happy
because clients kept asking them to
search for more opportunities. This
is a big change because in the past,
many of the ultra-wealthy used to
place a very controlled exposure, or
completely stay away from these asset
classes.
Chido: Why do you think this has
happened?
Eva: The ultra-wealthy are
entrepreneurs who have enjoyed
great success in generating money
from their businesses over the past 2
to 3 decades. However, they also saw
that the internet was transforming
the market and discerned clearly
that their businesses also needed a
transformation or makeover. Placing
allocations into ICT companies is on
one hand their private investment
seeking a fast-leapt or exorbitant-
soared return, whilst on the other
hand, being the shareholders sitting
on the board, they want to get access
to insider information that might be a
key learning source for renovating their
own businesses.
Chido: Do you feel that over the next
few years some of these investments
will be changing?
Eva: Guessing is a hard game and
the investment allocation for ultra
high-net-worth individuals (UHNWIs)
depends upon their unique preference
as well as what is coming up in the
market. Many emerging wealth
investors will chase whatever the latest
trend is as they are not very mature
and the less sophisticated investors
like to follow the crowd, which means
that they could easily forget their own
objectives or limitations. They are also
influenced by their private bankers to a
considerable extent.
Not many UNHWIs or family offices in
Asia who have their own investment
management committees or teams
can manage the investment in a
very systematic approach. You
cannot compare or benchmark
their investment operation with an
established asset manager, pension
fund or any other private equity house.
Within the office, the key-man
dominates the decision making. Many
hired investment professionals prefer
to act in a way to please their bosses,
so they observe what the patriarchs
want and have a higher tendency not
to follow the science for professional
investment management decision
making but rather the will of the key-
man. This is probably attributed to
the Asian culture where they regard
themselves as subordinates rather than
professionals when they deal directly
with their bosses.
As the investment decision is presently
managed by the first generation, the
aforementioned style of investing
won’t change a lot until the next
generation really takes over.
Chido: Have there been any
regulations that have influenced the
“Asian wealth owners have a
special interest in infrastructure
and commodities . . . ”

9. 9
Considering the changes to Asian based private bankers’ approach to investing
types of investments that private
bankers allocate to?
Eva: Not on investing, but there have
been some that have had an impact
on account opening processes such
as AML (anti money laundering)
regulations that affect this process
rigorously. There have also been some
that impact customers’ experience.
Many clients find the account opening
process is stalled due to cumbersome
compliance and control checking.
For UHNWIs and family offices
with substantial assets investing in
pension funds or those who own
private foundations and appoint
external managers, they struggle in
seeking alpha. The low interest rate
environment posed a challenge to
traditional investment and forced the
managers to exploit alternative asset
classes. However, regulations like
disclosure on fund expense ratio or
total expense ratio drive customers’
attention to focusing solely on the
cost. The use of alternative investment
inevitably raises the cost and prompts
resistance from investors. Global
pension funds that allocate monies
diversely into offshore markets are
likely be affected by the myriad of
regulations shaping up in these
different regions.
For example, in Switzerland, because of
the regulations introduced, the director
of a pension house who is ultimately
responsible for their investment act
is less willing to approve exposure
or allocation to risky asset classes
or make any mistakes. In addition,
many regulators also launched new
legislation and regulations to prohibit
deceit, misrepresentation and other
fraud. Though the process is stressful,
it is good for the market and the
investors as sustainable development
can only be nurtured in a healthy
ecosystem.
I also predict that there is an upcoming
trend where UNHWIs may buy into the
discretionary portfolio management
services (DMS), though Asian investors
have exhibited a
clear preference for
maintaining control
in the past. There
are a number of
reasons behind this.
Private bankers and
registered investment
advisers are pushing
these services
aggressively. Since
2014, the major banks
and big names were
pushing DMS and many marketing
dollars have been spent, so results
must be generated. In addition, private
bankers are now actively discussing the
succession management and wealth
planning with their clients. Ample time
is allocated in the discussion about the
structure, design, and the legitimate
tax minimisation. In this situation,
the time left for deliberating the
investment arrangement is trimmed,
thus, DMS is becoming a good quick fix
solution.
Chido: Are there any other trends that
you see coming through?
Eva: In terms of the outlook, the
possible asset class that will come into
this space and attract institutional
money in Asia is commodities as this
is something that Asian investors like
to invest in. Gold and oil prices have
dropped significantly. In the past
few months we have seen ongoing
acquisitions and dynamic dialogue
about acquiring mining sites and
investing into resources related
projects.
In 2015, many deals will be concluded
as there are many already in the
pipeline. Asian investors will also start
investing in equity because people
believe that the market is recovering
so they will place more exposure in
equities. Part of the whole pie will be
assets that generate stable return, so
fixed income has an unshaken role.
However, the low yield environment
gives China a hard time and turns
investors’ interest towards senior loans,
subordinated debt by banks or high
dividends paying stocks that people
traditionally liked to invest in.
Real estate will stay neutral as some
markets have already reached crazy
prices and the tax issue also means
that investors need to consider not
only the asset appreciation, but the
need to pay the taxes out. There are
still opportunities in real estate, not
just in the UK or the U.S, but in other
regions, for better returns. There is
more interest in agriculture related
and commercial real estate. These will
be the areas that the institutional and
ultra-affluent investors will want to
invest into.
Chido: Thank you for sharing your
thoughts on this topic.
“investors will also start investing
in equity because people believe
that the market is recovering . . . ”

10. 10
Chido Tagarira: What types of
investments do you mostly allocate
to?
Ritu Arora: We are a life insurance
company that mostly invests in
domestic debt and equity markets. We
are restricted from making investments
in foreign currency or foreign assets.
Hence, all of our investments are Rupee
(INR) denominated Indian investments.
Chido: What are the restrictions?
Ritu: There are regulatory restrictions
in India on life insurance companies
holding foreign currency assets and
overseas investments.
These restrictions are not unique to
India; other Asian markets like China
and Malaysia also restrict life insurance
companies from making overseas
investments.
As a developing economy, the
country has large capital investment
requirements. So insurance plays an
important role in both mobilising small
savings to build financial assets and in
capital investments.
Chido: How have your investment
strategies evolved over the last
5-10years? Have you moved away,
or towards, any specific types of
investments?
Ritu: In India, life insurance was
opened to private companies about
14 years back. Over these years, the
product mix has evolved significantly
and the investment strategies have
evolved accordingly too. The products
now include a healthy mix of non-
participating products, unit-linked
products, participating products,
pension and general annuities. The
traditional participating and non-
participating products had very limited
equity exposures, were categorised as
“Held to Maturity”, and the investment
strategies were largely guided by asset
liability matching (ALM).
Over the years, with the change in
product mix, equities have become
a significant part of insurance
companies’ portfolios. Unit-linked debt
funds, which are marked to market
daily, focus on returns linked with
moving interest rate curve. Unit-linked
products have significantly changed
the investment strategy of insurance
companies.
What has not changed is our inherent
philosophy of being long-term
investors, keen to generate consistent
returns and capital appreciation for our
policyholders. We continue to believe
in running a balanced portfolio of high
quality bonds and equity.
Chido: Given the constant challenges
of trying to balance risk and return,
how do you decide when it is suitable
to add or reduce risk?
Ritu: We are fairly structured in
our approach and work within the
framework defined in our investment
policies. The governance structure is
elaborate and enjoys the oversight of
the board of directors who approve
policies and mandates. The mandates,
risk parameters, and benchmarks are
well defined and provide guidance.
We have a team of highly qualified
fund managers and analysts who
help us identify good investment
opportunities. We have flexibility
within the mandates to make changes
to the portfolio composition.
Furthermore, we annually define,
review, and adopt a risk appetite
statement which defines our appetite
around credit risk, market risk, liquidity
risk, counterparty risk, etc. We also use
sophisticated risk tools and simulation
tools.
Chido: Aside from the regulations that
you mentioned earlier that restrict
you from investing overseas, what
other regulations have had an impact
on your investment strategy?
Ritu: We are guided by our investment
policies and the best practices of our 3
shareholders. We also leverage on the
global experience of HSBC Insurance.
Our policies and mandates, in addition
to regulations, provide us with a
solid framework which ensures that
we meet the commitment made to
policyholders.
Chido: Are there any other factors
that influence your investment
strategies?
Ritu: As a life insurance company,
our products and liabilities are long-
dated. Debt investments accordingly
are concentrated at the long end
of the curve. This end of the curve
is not the most liquid or deep, and
offers relatively fewer investment
opportunities.
Presently, insurance companies’ assets
under management are concentrated
between debt and equity related
assets which clearly indicates an
unfulfilled space for alternative assets
as a portfolio diversification and
1.3 INTERVIEW
An Indian based life insurer’s perspective on the evolution of investment strategies
Interviewer Interviewee
Ritu Arora
Chief Investment Officer,
Canara HSBC Oriental
Bank of Commerce Life
Insurance
Chido Tagarira
Senior Publisher

11. 11
An Indian based life insurer’s perspective on the evolution of investment strategies
yield-enhancement strategy. Although
regulations have been opened for
facilitating such investments, the
options available are pretty much
limited from a quality perspective.
Chido: Is infrastructure on your radar?
Ritu: Yes very much so. As we have
long-dated liabilities, any investment
opportunity which can generate
long-term cash flows is appealing. We
already have significant investments
in bonds and debt issued by
infrastructure companies. I would
expect the allocation to increase
further in the future. Insurance
companies have been large investors in
infrastructure companies and projects
in countries like Australia.
We expect Real Estate Investment
Trusts (REITs) to also be an attractive
investment option for insurance
companies in India.
Chido: So the future investment
trends will be a move towards
infrastructure and real estate?
Ritu: In India, there will be significant
focus on building infrastructure over
the next few years, and I would expect
insurance companies like ourselves to
participate by investing in the same.
REITs, derivatives and real estate as
investment options will also become
more popular.
Chido: Are there any final comments
on your investment strategy?
Ritu: We are committed to delivering
consistent performance in all our
portfolios in line with the defined
benchmarks. The approach is very
structured, with a well-defined strategy
and risk parameters. The idea is to
build a portfolio for the long-term,
comprising of good quality bonds
and equities which helps us deliver
consistent strong performance over
many years.
Chido: Thank you for sharing your
thoughts on this topic.
“any investment opportunity
which can generate long-term
cash flows is appealing. ”

12. 12
SECTION 2
THE VALUE OF DIVERSIFICATION
How can exposure to alternatives enhance investment portfolios and help to
generate consistent returns?
2.1 INTERVIEW

13. 13
Chido Tagarira: In your view, what are
the popular asset classes that Asian
investors tend to favour? Why do
think that is?
Rahma: For pension funds like us
who manage assets against certain
liabilities, of course liability matching
assets such as domestic bonds - that
have similar duration to our liability
duration - still make up a major portion
of our risk portfolio. This is to minimise
the downside risk on surplus between
asset and liability which is a major
concern for our plan sponsor.
To manage risk better, however, we
need to be allowed to invest in some
derivative instruments for hedging
purposes given that there is currently
no zero coupon government bond
whose duration is close to our liability
duration, especially for the long end
ones.
For return enhancement purposes, we
rely mostly on the domestic equity
asset class as we are prohibited from
investing offshore. Although, in some
neighbouring countries, institutional
investors are already allowed to invest
offshore.
Chido: So it is just domestic
investments that make up your
current allocations?
Rahma: Our risk portfolio basket
consists of domestic government
and corporate bonds, but with much
shorter duration in comparison to
our liability since, as I mentioned
earlier, there is no zero coupon bond
whose duration is close to our liability
duration. Therefore, by having quite a
long duration gap between asset and
liability, our current surplus is still quite
vulnerable to interest rate movement.
Our return portfolio basket mostly
consists of domestic listed equity, a
very small portion of direct property
and private equity. Current regulations
prohibit us from investing offshore and
there are internal as well as external
constraints in investing in alternative
investments. However, the agreement
among ASEAN countries to enter the
ASEAN Economic Community that
requires member countries to open
their investment boundaries may open
up an opportunity where regulation
will allow pension funds to invest
offshore. This would enable us to
diversify our return portfolio toward
offshore equity investments, subject
to our plan sponsor’s risk appetite, our
competence, as well as our capacity.
Even though our risk free rate
in Indonesia is relatively high in
comparison to neighbouring countries,
investing in selected sectors or stocks
might be worthwhile given that
the current domestic equity market
capitalisation is quite low, as well as the
depth. This means that we are exposed
to the risk of investing in overvalued
and undervalued assets due to limited
opportunity, as well as liquidity.
Our market cap to GDP ratio was
45.3% in 2012, much lower than other
countries for example the Philippines
105.6%, Thailand 104.7%, Singapore
144.3%, and Malaysia 156%.
Some multinational fund managers
that operate in Indonesia are preparing
to capitalise their networks to sell an
offshore fund.
Chido: What would it mean for your
portfolio if you were able to invest
offshore?
Rahma: If, and when, our regulator
and plan sponsor allow us to invest
offshore, we will have to review
our asset allocation policy that is
expected to reach the optimal risk/
return trade-off considering the new
investable asset class. This will mean
that we have to modify our investable
efficient frontier curve by adding
offshore equities as a new asset class
based on expected return, risk, as well
as correlation coefficiency among
those asset classes. So we have some
homework to do before getting
approval from our plan sponsor,
aligned with their risk appetite.
Chido: What role can alternative asset
classes (those that are not bonds
or equities) play in an investment
portfolio?
Rahma: As pension funds are long-
term investors, they do not demand
as much liquidity as other investors,
so alternative investments such as
private equity and direct property can
actually provide illiquidity premiums
to enhance our return portfolio. By
not being exposed to price-earnings
ratio volatility, it could also add the
diversification benefit to our portfolio
and reduce the overall risk of the
portfolio.
We also have a desire to increase our
exposure to alternative investment
and implement the Yale Model. But,
as I mentioned earlier, there are still a
number of external as well as internal
constraints to overcome. These include
limited internal competency and
INTERVIEW
How can exposure to alternatives enhance investment portfolios and help to
generate consistent returns?
Interviewer Interviewee
Siti Rakhmawati (Rahma)
Head of Investment Analyst,
PT Telekomunikasi Indonesia
Pension Fund
Chido Tagarira
Senior Publisher

14. 14
How can exposure to alternatives enhance investment portfolios and help to generate consistent returns?
capacity which needs to be improved,
and the fact that the alternative
investments industry is not quite
established here as there are very
few limited partners, hedge fund
managers, financial advisors and
venture capital managers that are
accepted by institutional investors
here.
There are also varying mind-sets
amongst our stakeholders about the
nature of this asset class. For example,
investing in a listed company versus
unlisted pre-operating company; the
two investments are certainly quite
different in terms of the probability of
the loss or tail risk, the time horizon
needed, operational risk, valuation risk,
liquidity risk, fraction/concentration
risk, cost of investing (due diligence
cost, valuation cost, cost of managing
assets), etc.
Chido: Which alternative asset classes,
if any, would you consider including
in your investment portfolio?
Rahma: Subject to the improvements
in our internal competence and
capacity, our stakeholders’ mind-sets
toward specific risk of alternative
investment, as well as the readiness of
support from other related professions
(advisors, valuers, etc), we would
consider direct property as we have a
demographic bonus with a fairly large,
young population. So the demand
for property, as well as the price, of
property assets will tend to increase.
We would also look at private equity or
medium-term notes in infrastructure
project since Indonesia infrastructure is
quite underdeveloped.
Derivative instruments could also be
interesting for hedging purposes,
especially to hedge interest rate risk,
since it would be costly to buy the
long end coupon government bond
available in the market in order to
reduce the duration gap between asset
and liability.
For offshore
investment, if already
allowed, we would
prefer listed equity
to other asset classes.
The reason behind
this being that the
risk of investing in
listed equity is lower
in terms of liquidity
risk, operational risk,
concentration risk as
well as transparency
risk. The cost of investing is also lower
(valuation cost, due diligence cost as
well as cost of managing assets).
Chido: Given the constant challenges
of trying to balance risk and return,
how do you decide when it is suitable
to add or reduce risk?
Rahma: You would add risk if the plan
is still underfunded; the member age
is quite young so the time horizon
is quite long; our sponsor financial
condition and business is quite strong
which means they can afford the
additional contribution to the plan
if investment returns are below the
expected rate; and if the economic
cycle is in the expansionary phase
so we could propose the ‘flight from
safety’ strategy.
Vice versa, you would reduce risk if the
plan is already in surplus where the
priority would be to maintain surplus,
the member age grows older so the
investment horizon become shorter;
our sponsor financial condition and
business deteriorating so their ability
to pay additional contributions to
the plan also diminishes; and if the
economic cycle is in the contractionary
phase so we should propose “flight to
safety” strategy.
Chido: Thank you for taking the time
to share your views on this topic.
“Derivative instruments could
also be interesting for hedging
purposes, especially to hedge
interest rate risk. . . ”

15. 15
SECTION 3
THE ASIA REGION FUNDS PASSPORT REGIME
Expectations for the Asia Region Funds Passport regime
3.1 INTERVIEW

16. 16
Chido Tagarira: What were the drivers
behind the introduction of the Asia
Region Funds Passport regime?
Manuel Gaite: The idea of an Asia
Region Funds Passport (ARFP) is
envisaged to provide an internationally
agreed framework to facilitate cross
border marketing of managed funds
across participating economies in the
Asia region. Here we are talking about
the collective investment scheme that
could also facilitate funds from the
Asian region that are being marketed
in Europe by way of perhaps an
Asian-European mutual recognition
agreement.
The main drivers behind the ARFP are
that it is envisaged to create a better
integrated financial market in the Asia-
Pacific region by breaking down some
of the barriers between economies;
to have more investment across the
Asian region; to boost regional trade in
financial products; as well as to create
an investment outlet that is similar or
comparable to the European UCITS.
Chido: Is it a similar structure to
UCITS?
Manuel: It is similar in the way it is
structured with the only difference
being that the ARFP carries different
currencies as opposed to the single
European currency. In Europe there
is the EU structure whereas, here we
don’t have a similar political structure.
Chido: How does the ARFP compare
to the Asean Collective Investment
Scheme and the Hong Kong-China
Mutual Recognition Scheme?
Manuel: They are very similar. The
only difference is the scope of the
application of these schemes and the
members of the different economies
that participate in the scheme.
Chido: What do you anticipate will be
the impact of the ARFP on the fund
managers in the member states, and
consequently their investors?
Manuel: Fund managers will be able
to offer a single fund across multiple
markets, and the resulting larger
client base will help to grow the fund
size sufficiently to realise economies
of scale. It also means better fund
performance in the form of higher
returns for investments with a lower
degree of risk. This will also create
greater global competitiveness within
the Asian fund industry.
The ARFP can introduce foreign
expertise, competitive pricing,
higher standards of disclosure and
performance to local funds. This, in
turn, will promote efficiency in the
local fund industry.
For the investors, this would mean
having direct access to offshore funds
and in the process, eliminating the
extra layer of fees and commissions
charged by local operators. It will
offer a broader range of foreign
products to choose from which
will enable investors to obtain
optimal fund performance through
a diversified portfolio because
spreading investments across different
independent jurisdictions can
eliminate a large part of the domestic
economy risk.
Chido: Will there be a review of the
regime to address the concerns
around tax and currency issues?
Manuel: We first started discussing
the ARFP 4 years ago and since then,
we have been in touch with fund
managers informally as we were
crafting the rules that would govern
the ARFP. In the first quarter of 2014,
we had a public consultation with
the different stakeholders here in the
Philippines and the fund managers
expressed apprehension considering
the small size of the local fund
management industry in comparison
to those in other Asian economies.
That is not to say that they are not
interested in the passport regime. They
admit that the cross border scheme is
a challenge for them, but it would also
allow them to improve their craft and
consider steps or strategies to compete
with their counterparts in the other
economies.
The fund managers have expressed
the importance of harmonising
regulatory differences, such as tax
treatments, across economies. They
expect the passport regime to reduce
administrative costs in moving across
borders. Under the framework,
participating economies shall ensure
full disclosure of their respective tax
and other regulatory requirements on
collective investment scheme which
will be considered by managers and
operators who would be interested in
availing the fund passport mechanism.
In the beginning, it will be a regime
of full disclosure of its different
treatments and then over time, as we
navigate through other rules, we can
INTERVIEW
Expectations for the Asia Region Funds Passport regime
Interviewer Interviewee
Manuel Huberto B. Gaite
Commissioner, Securities
and Exchange Commission,
Philippines
Chido Tagarira
Senior Publisher

17. 17
Expectations for the Asia Region Funds Passport regime
harmonise the regulations relating to
the cross border transactions of funds.
Chido: Is it a feasible task to be able to
harmonise these regulations across so
many jurisdictions?
Manuel: In the case of Hong Kong
and China, they are doing a mutual
recognition scheme. Ideally you can
have different economies agreeing on
a common framework, but that might
take some time. So where we agree, we
have common rules. We also agreed
on when the home rules and host rules
will apply.
For the simple issues, we have agreed
to have common rules. For the more
complex issues, we have agreed to
tackle them in the future. We have
recognised issues where the home
and host rules will apply, and we have
a mechanism for discussing any issues
which may arise once the ARFP goes on
stream.
Chido: What does the timeline look
like?
Manuel: We are almost at the end
of the discussions regarding the
rules. Regarding the timeline, we are
fine-tuning the rules and are now
going through the second public
consultation. By the end of April 2015,
we will be able to have the result of
the public consultation and then meet
in May to discuss the final draft of the
rules.
We are looking to sign the Multilateral
Memorandum of Understanding
(MMOU) for the passport rules possibly
at the end of 2015. This project is under
the auspices of the finance minister
process of Asia-Pacific Economic
Cooperation (APEC). As the APEC
meeting for 2015 will be in Manila
in November, the plan is to have the
signing of the MMOU about that time.
Chido: Do you have any comments
regarding the currency issues?
Manuel: We have not
yet discussed that
in much detail. As
far as the tax issues
are concerned, it will
be a full disclosure
of the tax regime
that any investor or
fund manager will
encounter in any of
the jurisdictions.
Chido: Thank you for
sharing your thoughts on this subject.
“We also agreed on when the
home rules and host rules will
apply. ”

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