Growing Domestic Institutional Investors 
by Jeremy Kloiser-Jones, CEO, Bagan Capital
August , 2014

Myanmar needs a domestic insti- tutional investment industry. While the banking system is an important mechanism for the mobilisation of savings and credit creation, institutional investors mobilise funds in a different way, providing risk capital across the entire spec- trum of risk.

So what is an institutional investor? Insti- tutional investors are organisations that ag- gregate the smaller-scale investment funds of individuals or smaller organisations to create more substantial parcels of capital which are then invested in various asset classes. They are professional or sophisti- cated corporate investors, usually, but not always, financial institutions. Institutional investors include banks, insurance com- panies, pension funds, mutual funds and alternative investment funds (hedge funds and private equity funds). Globally, among the largest institutional investors are well- known names such as JPMorgan, Fidelity, Blackrock, UBS and AXA. Japan is home to the world’s largest pension fund, the Gov- ernment Pension Investment Fund, with over $1 trillion in assets. We also include in this category state-owned sovereign wealth funds, investing funds on behalf of their country’s citizens, with GIC of Singapore, the Government Pension Fund of Norway and Abu Dhabi Investment Authority (UAE) being examples of these.

To illustrate, take the case of a corporate pension fund. The company pays into a pooled fund on behalf of each employee and these funds are entrusted to an institutional fund manager who will invest them for the long term, with the aim of providing for the required benefits of employees when they retire. The key point here is that the fund invests for the long term, and, in this con- text, can be comfortable with short-term in- vestment risk. The provision of risk capital within an economy is crucial to its ability to create long-term wealth. It’s worth noting that Amazon, Google, Facebook and Alibaba, very large and successful but still relatively young companies, have all benefitted from the availability of risk capital. Of course, given the diverse array of institutional inves- tors, there is considerable variation in assets allocation patterns. They invest in securities such as stocks and bonds, as well as real es- tate and infrastructure, and are prominent in the provision of venture capital.

It is because the long-term context shapes the investment policies of most institutional investors that their emergence is potentially so important for an economy such as Myan- mar’s. Active institutional investors can help fund two critical aspects of the country’s de- velopment – government operations and infrastructure. Governments always need money, and they are often (though not al- ways) rated as the best credit risk in an econo- my. Where the risk is considered reasonable, institutional investors are natural buyers of government issued bonds. Lending money to governments is one of the things that in- stitutional investors do best, and aside from the social and economic benefits that fund- ing the government may generate, an active government bond market provides bench- mark interest rates for the financial system and aids risk pricing throughout the econo- my. Given the magnitude of the investment funds typically under their control, institu- tional investors play a prominent role in fi- nancial markets and their development will also be critical to the evolution of equity and general capital markets with the necessary depth in Myanmar, essential to underpin the country’s continued economic growth. Such growth will clearly depend also on serious infrastructure development in Myanmar, potential investment projects well matched to institutional investors with long term in- vestment horizons, such as insurance com- panies and pension funds. Toll roads, power plants and telecom networks are among the infrastructure projects to which institution- al investors may be attracted, either within a public-private partnership (PPP) arrange- ment or a solely private sector venture.

While it will take some time for Myanmar to develop institutional investors, I believe that it can grow these at an earlier stage than oth- er developing economies. Developing coun- tries with reasonably well-established bank- ing systems often find it difficult to break with debt finance and grow institutional investors. Although steadily increasing in importance, the Myanmar banking system is still becoming established and its focus is necessarily on getting core activities done well and there would seem to be ample scope for the concurrent genesis of other capital intermediaries, perhaps in association with the expansion of the insurance industry (and admission of new non-government insurers) or in the form of a sovereign wealth fund arising from the need to manage government oil and gas revenues. Institutional investors can gather assets from private individuals who voluntary entrust their savings to the institution, or their assets may grow natu- rally, for example in response to the need to invest the proceeds of insurance policy sales. Another model, used in Australia, is to glean a mandatory minimum contribution from each worker’s salary, no matter the indus- try or employer, to be applied to providing a post-working life benefit, creating a growing pool of capital that requires investing. This scheme could be adapted to fit Myanmar’s circumstances.

To maximise their potential contributions to the economy, such developments would need to be supported by a revamp of relevant regulations to allow greater flexibility for fi- nancial institutions in determining how their funds will be used.

Comments and questions are welcome and should be addressed to ingoodcompany@ bagancapital.com.

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