Khazanah’s chief investment officer urges investors to ‘co-parent’ Asian firms amid weak returns
He says public market investors can play a more active role, while private equity can acquire underperforming assets
[SINGAPORE] Investors, including private equity and venture capital firms, should not be “neglectful parents” of the companies they back, but instead “co-parent and shape” underperforming businesses to improve the reward for taking on market risk in Asia, said Hisham Hamdan, chief investment officer of Malaysia’s sovereign wealth fund, Khazanah Nasional.
Speaking at a panel on Wednesday (Oct 1), Hisham noted that investors in developed markets can afford to take a passive approach across multiple asset classes, as beta has been consistently strong. A higher beta reflects greater price swings and volatility, but in these markets, it has also translated into better returns.
“(But) when it comes to emerging markets, passive investing is a problem because it gets accentuated by the problem in Asia where beta has not been rewarded,” he said, pointing out that returns in Asia have been lower despite higher volatility compared to developed markets.
Hisham urged investors to take a more hands-on approach. Public market investors can play a more active role, while private equity can acquire underperforming assets, and venture capital can support innovation.
“And that’s how we improve the beta – from funding the small companies, shaping the old companies, and also making sure that they all perform with a return on equity,” he said.
He was responding to a question from moderator Richard Lui, a journalist at NBCUniversal, on whether the efficient frontier is broken and whether opportunities exist in weak beta. The efficient frontier is a portfolio theory concept that identifies the optimal balance between risk and return.
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The discussion took place during a panel titled “The State of Global Capital Markets and the Future of Finance”, part of the Milken Institute’s three-day Asia Summit held at the Four Seasons Hotel Singapore.
Now in its 12th year, the summit brings together more than 1,200 leaders and experts from over 40 countries for high-level dialogues, panels and roundtables on regional challenges and global collaboration.
Alongside Hisham, the panel featured David Chua, chief investment officer of Income Insurance; Noriko Honda Chen, portfolio manager at Capital Group; and Michael Goosay, chief investment officer of Principal Asset Management.
Chiming in, Chen said that there needs to be top-down government intervention and regulatory change to improve the beta in Asia as well, such as by creating an ecosystem for innovation and entrepreneurship.
She pointed to how regulatory changes over the last two decades have helped to improve the valuations of Japan’s companies.
“Going forward, there are a lot of opportunities (in Asia) because I think that the companies are much more focused on better businesses, possibly even selling down or writing off their loss-making businesses,” said Chen.
On the biggest short term risk to the market, Goosay pointed to US tariffs and de-globalisation.
“I think that’s something we all need…to take into account when we’re going through our investment thesis on different ideas,” he said. For example, asset managers must consider the implications of tariffs on inflation and labour supply. Goosay said he expects more local investments in fixed income in the wake of the US pulling back as a global partner.
Singapore’s approach
In his opening remarks earlier in the day, Defence Minister Chan Chun Sing had also addressed Singapore’s approach to rising global uncertainty.
Chan said that two extreme scenarios could emerge. On one extreme, the world could continue to fragment, with different countries going into different blocs. This would diminish the overall global economic potential as markets try to optimise at local levels. On the other extreme, the world could eventually foster greater global integration to build rules for the common good.
While the world is unlikely to reach either of these extremes, where it does end up in the future depends on how governments and companies respond, said Chan.
Amid these changes, Singapore will “double down” on four things to adapt to a changing world, said the minister.
The first is to maintain political stability so that the country can have policy consistency and continuity.
Secondly, Singapore will “double down” on the consistent and fair application of the rule of law. This is especially so in financial markets where rules have to evolve quickly to ensure that financial innovations come with guardrails.
Thirdly, Singapore will forge new partnerships, not just with countries, but also with companies, as they will also play an important role in developing global rules.
Lastly, Singapore will continue to invest in its people to ensure they can continue to earn their keep.
“This is also the way that we can keep our society cohesive and united, and not be divided by the unequal distributions from the fruits of work,” said Chan.
Addressing the audience, he added that industry leaders have a responsibility to push for new models of collaboration and a fresh set of rules to guide the new economy.
“Your voices must be heard in your respective countries at the political level. You must give confidence to your own leaders that this is what the business community and the market desire,” said Chan.
Secondly, corporates should invest in their workers so that they do not feel left behind and continue to support the system, said Chan.
He added: “So I think these are two simple things that corporate leaders all over can join hands to do – to develop our people and have your voice heard that you prefer a more integrated global trading and economic investment system.”
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