December 16, 2013 11:22 pm

Worry about end-clients, not the asset managers

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From Mr Jan Dehn.

Sir, Kindly allow me to take issue with two points in Martin Wolf’s article “Asset managers could blow us all up” (December 11).

First, the idea that asset managers can disrupt the entire global financial system is too simplistic. Asset managers act on behalf of innumerable owners of capital in a huge range of products across a plethora of markets. Often the funds are managed passively or in quasi-passive strategies, which give limited or no discretion to the manager. What matters more is what end-clients think or do, and their decisions are taken in the investment committees of pension funds, insurance companies, mutual funds, sovereign wealth funds and central banks the world over. Their decisions are, in turn, heavily influenced by regulators. If Mr Wolf is worried about a blow-up, he should pay more attention to financial repression, which is the process whereby regulators are sowing the seeds of the next financial crisis by forcing institutional investors to plough ever more money into government bonds in the heavily indebted developed countries.

Second, Mr Wolf’s concern about currency mismatches is fair, but he appears more influenced by prejudices about emerging markets that are a quarter of a century out of date than by facts. As of end-2012, total external debt in emerging markets was 19 per cent of gross domestic product compared with 271 per cent in the HIDCs. External debt was 1.9 times the level of reserves in emerging markets, but 38 times larger than reserves in the HIDCs, according to data compiled by Credit Suisse. Gross external debt issuance is poor proxy for currency mismatches. Many emerging markets corporates have revenues and assets denominated in US dollars (ie oil, mining, resources companies), while others hedge or swap foreign liabilities into local currency. Does that mean that currency mismatches are irrelevant? Of course not. But most emerging market countries with corporate FX mismatches also have strong central bank reserve cushions, which gives them the means to stabilise currencies. China is a good example.

Jan Dehn, Head of Research, Ashmore Investment Management, London WC2, UK

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