In 1997, the Asian economic success story came to a crashing halt. The region’s economies started to weaken, and banks refused to roll over loans that companies had borrowed in US dollars on a short-term basis. Credit dried up. Governments devalued their currencies. The International Monetary Fund stepped in. And borrowers defaulted on more than US$40 billion in bonds.1 A liquidity crisis and financial crisis swept through the region. “This was a scary time,” says Elliot Hentov, head of policy and research with State Street Global Advisors’ Official Institutions Group.
When the dust settled, he says, governments from across the region recognised that a lack of domestic currency long-term borrowing had contributed to the crisis. This had a number of implications, not least of which was the need to move away from short-term foreign currency borrowing, which can cause a crisis to spiral.
In response, a coalition of the 11 leading central banks in Asia turned to State Street Global Advisors to develop a unique solution to encourage the creation of a strong local currency bond market, which — (experts believed) — could have helped to limit the damage in ’97.2 To outsiders, State Street Global Advisors may have seemed like a surprising choice. At the time, the firm did not have a long track record in this space.
So why did the coalition of Asian countries choose State Street Global Advisors? “We were an attractive partner for the coalition for a variety of reasons,” says Louis de Montpelier, global head of the Official Institutions Group.
“The firm’s fiduciary culture and expertise in risk management, coupled with our sophisticated money management capabilities, all helped to build confidence.”
Using the same portfolio management and risk analysis systems that the firm used for all of its other existing index mandates, State Street Global Advisors demonstrated how its systems operated seamlessly in exactly the same way across markets in real time. “We were able to make the case that we could manage their mandate identically to our other business, leveraging the expertise we’ve built in other areas,” Louis says.
The resulting solution — a regional local currency bond exchange-traded fund (ETF) — was unique, using custom indexing, sophisticated balancing and an index methodology that tilted toward factors such as sovereign rating and liquidity. The ABF Pan Asia Bond Index Fund (PAIF) was a low-cost fixed-income ETF that made it easier to invest savings back into the Asian economy. At the same time, it was structured with daily creation and redemption limits to ensure that the fund would not be overwhelmed with inflows or outflows. Louis says, “PAIF allowed the central banks to help prevent a future crisis while also creating an investment opportunity for those who otherwise wouldn’t be able to invest in that asset class.”
More than a decade later, PAIF is going strong with $4 billion in assets under management.3 More important, so are the Asian economies. Liquidity is ample, and local and regional governments that need capital can be matched with investors. Global institutions have increased their exposure to Asian debt, which is now included in many of the broad global indexes. In addition, most primary buyers of bond issues now reside in Asia. “In many ways, PAIF helped a region in crisis figure out how to recycle savings, which in turn has helped them not only reinvest in their economy, but also reinvent it in many ways,” Louis says looking back now. “As an asset manager, you can’t ask for more than that.”
1 “Asia’s Bond Market Boom Looks Set to Continue,” Institutional Investor, April 2011. 2 Ibid. 3 State Street Global Advisors, as of September 30, 2017.
Products referenced in this piece are not available in all regions. These references are provided for illustrative purposes only. The content of this web page should not be considered a recommendation to invest in a particular sector or to buy or sell any security mentioned.
The above-referenced SPDR S&P 500 (SPY), fund has not been registered for sale in or listed on any market outside of the United States, nor has any regulatory authority outside of the United States approved the sale or distribution of the funds. Persons wishing to invest in the SPDR S&P 500 (SPY), fund should satisfy themselves as to full observance of the laws of the relevant territory in which they are resident in connection with any such investment.
Please note that not all securities and services may be available, registered or authorized for distribution in every jurisdiction across the globe. Information should not be considered a solicitation to buy, an offer to sell, or a recommendation of any security or service in any jurisdiction where such offer, solicitation or recommendation would be unlawful or unauthorized.
For use in Australia. Issued by State Street Global Advisors, Australia, Limited (AFSL Number 238276, ABN 42 003 914 225) (“SSGA Australia”). Registered office: Level 17, 420 George Street, Sydney, NSW 2000, Australia T: +612 9240 7600 Web: ssga.com. This communication is directed at institutional and wholesale clients only. The products and services to which this communication relates are only available to such persons and persons of any other description (including retail clients) are not entitled to rely on this communication.
For use in EMEA. The information contained in this communication is not a research recommendation or ‘investment research’ and is classified as a ‘Marketing Communication’ in accordance with the European Communities (Markets in Financial Instruments) Regulations 2007. This means that this marketing communication (a) has not been prepared in accordance with legal requirements designed to promote the independence of investment research (b) is not subject to any prohibition on dealing ahead of the dissemination of investment research. The information provided does not constitute investment advice as such term is defined under the Markets in Financial Instruments Directive (2004/39/EC) and it should not be relied on as such. This communication is directed at professional clients (this includes eligible counterparties) who are deemed both knowledgeable and experienced in matters relating to investments. The products and services to which this communication relates are only available to such persons and persons of any other description (including retail clients) should not rely on this communication.
For use in Switzerland. The information provided does not constitute investment advice as such term is defined under applicable Swiss regulation and it should not be relied on as such. All material has been obtained from sources believed to be reliable. There is no representation or warranty as to the accuracy of the information and State Street shall have no liability for decisions based on such information. This communication is directed at qualified investors (as defined by FINMA) who are deemed both knowledgeable and experienced in matters relating to investments. The products and services to which this communication relates are only available to such persons and persons of any other description (including retail clients) should not rely on this communication.
The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your tax and financial advisor. All material has been obtained from sources believed to be reliable. There is no representation or warranty as to the accuracy of the information and State Street shall have no liability for decisions based on such information.
The views expressed in this material are the views of State Street Global Advisors through the period 5/15/18 and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. The trademarks and service marks referenced herein are the property of their respective owners. Third-party data providers make no warranties or representations of any kind relating to the accuracy, completeness or timeliness of the data and have no liability for damages of any kind relating to the use of such data. Investing involves risk including the risk of loss of principal. The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without SSGA's express written consent.
This information is for informational purposes only, not to be construed as investment advice or a recommendation or offer to buy or sell any security. Investors should always obtain and read an up-to-date investment services description or prospectus before deciding whether to appoint an investment manager or to invest in a fund. Any views expressed herein are those of the author(s), are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may make different investment decisions for different clients. There are no guarantees regarding the achievement of investment objectives, target returns, portfolio construction, allocations or measurements such as alpha, tracking error, stock weightings and other information ratios. The views and strategies described may not be suitable for all investors. SSGA does not provide tax or legal advice. Prospective investors should consult with a tax or legal advisor before making any investment decision. Investing entails risks and there can be no assurance that SSGA will achieve profits or avoid incurring losses.
Performance quoted represents past performance, which is no guarantee of future results. Investment return and principal value will fluctuate, so you may have a gain or loss when shares are sold. Current performance may be higher or lower than that quoted.
Images of NYSE Group, Inc. are used with permission of NYSE Group, Inc. Neither NYSE Group, Inc. nor its affiliated companies sponsor, approve of or endorse the contents of this program. Neither NYSE Group, Inc. nor its affiliated companies recommend or make any representation as to possible benefits from any securities or investments.