For generations, wealthy Asians built their capital by focusing on their own businesses. Entrepreneurs re-invested into their business, because this provided better returns than most other asset classes. Any spare cash largely went into buying property, a secure and tangible asset.
There was little alternative to this approach. Restrictions in many Asian economies against investing overseas meant entrepreneurs had very limited choice.
Just 20 years ago, local bond markets were either non-existent or under-developed. That meant the only other option was to invest in local shares, taking on unpredictable economic and political risks, not to mention currency risk in the case of investors with an international portfolio.
Sticking to properties turned out to be a profitable strategy. SGD1 million invested in a typical Singapore private property in 1994, say, would be worth close to SGD2 million today. In comparison, a similar amount placed in the benchmark MSCI Singapore stock index would have gained about 40 per cent over the past 20 years, not enough to protect against inflation.
However, going by what has happened in developed economies, this could all change in the coming years and we may see a gradual shift in the mindset of Asia’s affluent towards a more long-term investment approach.
Economic reform could boost investment
The first generation of Asian entrepreneurs prospered by being agile and opportunistic – taking on very concentrated risks rather than accepting lower but more stable returns through diversification.
The next generation is likely to have a very different view of the world. For one, they are likely to be keener on capital preservation. They also have far more investment choices, and the rapid economic development across Asia over the past two decades has reduced volatility and risk.
“Low inflation and interest rates over the past decade will help facilitate a move towards longer-term investment”
Asia’s relatively low inflation and interest rates over the past decade – largely a result of the policy reforms undertaken since the financial crisis of the late 1990s – will help facilitate a move towards longer-term investment.
As large and relatively closed economies such as China, India and Indonesia undertake further reforms to open up and deepen their capital markets, opportunities for investment are likely to grow even further.
Diversification is key to preserving wealth
Domestic bond markets have evolved substantially across Asia in recent years along with the local pension fund industry. Most regulators in the region now allow their citizens to invest in other markets as well, and banking and capital markets have developed to enable them to do so.
There’s little doubt that there will be pressure on the new generation to keep generating the high returns of the past. Thus, short-term security selection and leveraged income investments will remain popular.
However, matching historical returns will become increasingly difficult, as economies mature and growth in Asia slows. Thus, diversification and buy-and-hold strategies will become even more important to preserving wealth.
“There’s value for Asian investors in building long-term portfolios”
Based on our experience with economies going through various stages of development, we believe there’s value for Asian investors in building long-term portfolios as this approach supports the goal of wealth preservation.
This is especially the case for non-professional investors who have a limited time to tend to their portfolios. Their long-term approach and the ability to weather periods of under-performance is a key competitive advantage for such investors compared to professional investors who are forced to worry about short-term performance relative to a benchmark.
We also believe real diversification across geographies and asset classes makes sense because a broad mix of assets reduces risks in the portfolio.
It’s not about trying to beat any particular market; it’s more about capturing alternative sources of returns from diverse markets. This approach, in itself, is going to be a paradigm shift for a whole generation of affluent investors across Asia.
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