The Economist (2022-01-08)

TheEconomistJanuary8th 2022 Finance&economics 65

Thedestitutionisalsoraisingconcerns
abouttheregion’sbanks,thecombinedas­
setsofwhichamountedto15.8trnyuanin
September.Baddebtsarealreadyhigherin
thenorth­eastthaninanyotherareaof
China;loan­lossprovisionsarethelowest.
Yetspotting acrisisin themaking isa
toughtask.Hidingbaddebtsisaneasy
trickforsmaller banks.Localregulators
areunderstaffed.Anddomesticcredit­rat­
ingagenciescannotbecountedontoiden­
tifyproblem lenders. In the first seven
monthsof 2021 ratingagenciesdowngrad­
edjustsixbanks.Theyoftentakeaction
onlywhena lenderisonthebrink.Huan­
chengRuralCommercialBank,basedinJi­
lin,forinstance,suddenlydeclaredthatits
netprofitshadfallenby42%notlongafter
it wasdowngraded.
Foraninsider’sviewonChina’sproble­
maticbanks,lookathowmuchinvestment
managersatthecountry’sbiggestlenders
chargesmalleronesforloans.Mostbanks
acrossChinapaysimilaryieldsonnegotia­
blecertificatesofdeposit(ncds),securi­
tiesthatresembleshort­termloansfrom
onebanktoanother,andwhichtradein
theinterbankmarket.Yieldspaidonncds
issuedbymostbanksacrossthecountry
fellthroughout2021,signallinga decrease
inperceivedrisk.Yetthosepaidbyissuing
banksinthethreenorth­easternprovinces
diverged fromthe restthroughout 2021
(seechart).
Theaveragepremiumpaidonone­year
ncds issuedbybanksinLiaoning,com­
paredwiththoseinhealthierprovinces,
shotupfromabout0.24percentagepoints
inFebruaryto0.65towardstheendofthe
year,accordingtoEnodoEconomics,a re­
searchfirm.BanksinHeilongjiangandJi­
linhavepaidsimilarpremiums.Thehigh­
eryieldsindicatethatlargebanksbelieve
thelocalgovernments ofthenorth­east
maystruggletobailouttheirfinancialin­
stitutionsintheeventofa crisis,analysts
atEnodosaid.(Thesurveyedncds wereall
stillratedasaaa, thesafestpossible,byrat­
ingagencies,however.)
Thenorth­eastisa primecontenderto

hostChina’snextbankingdisaster.Ofthe

four majorbail­outs ofcity commercial

bankssince2019,twohavebeenbasedin

theregion.Failuresofregulationandcor­

porategovernancehavemeantthatsome

institutions have comeunder theinflu­

ence ofprivate corporations or individ­

uals, who have skewed their lending.

ShengjingBank,a largebankbasedinLiao­

ningwithassetsof1trnyuan,hasa high

levelofexposuretoEvergrande,a failing

propertydeveloper.Someoftheregion’s

lendershavelostbillionsofdollarswhen

financialproductshavegonesour.Regula­

torsinLiaoningrecentlyplannedtomerge

12 troubledbankstogetherinanattemptto

preventacrisis.Thatplanwaslaterwa­

tereddowntojusttwo.Itisunclearhow

theproblemsattheremainingtenlenders

willbehandled.n

Outinthecold

Chinesebanks,yieldsonnegotiable

certificatesofdeposit,byprovince,%

Sources:EnodoEconomics;Wind

*Representativeofother

low-riskprovinces

4.0

3.5

3.0

2.5

2.0

2020 2021

Heilongjiang

Liaoning

Jiangsu*

Jilin

Assetmanagement

Direct to market

I

n 2001 andrew lo,  a  professor  at  the

Massachusetts  Institute  of  Technology,

predicted  that  technological  advances

would  one  day  allow  investors  to  create

their  own  personal  indices  designed  to

meet their financial aims, risk preferences

and tax considerations. Such an idea “may

well be science fiction today”, Mr Lo wrote,

but “it is only a matter of time.” More than

20 years later, that time may have come.

A  revolution  in  passive  investing  that

began in the 1970s led to the introduction

of  funds  that  track  the  performance  of  an

index,  such  as  the  s&p500,  affording  in­

vestors diversification at a low cost. Now a

growing number of American fund manag­

ers  and  brokers  are  offering  retail  clients

more personalised products that combine

the  benefits  of  passive  investing  with

greater  customisation.  Direct­indexed  ac­

counts,  as  such  products  are  known,  pro­

mise to track the performance of a bench­

mark index. But unlike off­the­shelf mutu­

al  funds  or  exchange­traded  funds  (etfs),

which  are  pooled  investment  vehicles

overseen by portfolio managers, investors

in direct­indexed accounts own the under­

lying securities, and can tailor their portfo­

lios to suit their needs.

The  idea  is  not  new.  “Separately  man­

aged accounts”, custom portfolios of secu­

rities  managed  by  professional  investors,

have been around since the 1970s. But such

products  have  historically  been  available

only  to  institutional  investors  and  “ultra­

high­net­worth”  clients  with  millions  of

dollarstoinvest.Todaydirect­indexedac­

countsarewithinreachofthe“massafflu­

ent”,withliquidassetsinthehundredsof

thousands. “It’s what institutions have

been doing for years,” explains Martin

Small,headoftheuswealth­advisorybusi­

nessatBlackRock,anassetmanager.“But

withtechnologyandscaleandmoreauto­

mation,wecandeliveritinsmallerac­

countsizes.”

Analystspointtothreeforcesbehind

thetrend.Thefirstisadvancesintechnol­

ogy, including sophisticated algorithms

andthecomputingpowerneededtocon­

tinuously analyse and execute trades

acrosshundredsofthousandsofportfolios

simultaneously.Thesecondistheriseof

zero­commissiontrading,whichdramati­

callylowerscosts.Thethirdistheemer­

genceoffractional­share trading,which

allowsinvestorstobuysecuritiesinbite­

sized pieces, making it easier to build

small diversified portfolios. Companies

likeAmazon,a singleshareofwhichcosts

morethan$3,000,canbeincludedwithout

breakingthebank.

Directindexingisstilla smallpartof

theasset­management industry. Accord­

ingtoCerulliAssociates,a researchfirm,

roughly $400bn was held in direct­in­

dexedaccountsbytheendofJune2021.But

MorganStanley, abank,andOliverWy­

man,a consultancy,estimatethatthisfig­

urecouldreach$1.5trnby2025,represent­

inga growthrateofnearly40%a year.In­

dustry executivesare bullish.“Personal­

isedinvestingiscomingatallofuslikea

freighttrain,”WaltBettinger,thebossof

CharlesSchwab,a broker,saidinOctober.

Suchenthusiasmhasfuelleda flurryof

acquisitions. In October 2020 Morgan

StanleyacquiredParametricPortfolioAs­

sociates,thebiggestproviderofdirect­in­

dexingservices.Amonthlater,BlackRock

snappedupAperioGroup,anotherbigpro­

vider.Severalotherbigfundmanagersand

brokers,including CharlesSchwab,Van­

guardandFranklinTempletonhavemade

similaracquisitions.“Nobodywantstobe

leftbehind,”saysKevinMaeda,thechief

The rise of personalised stock indices

DIY diversification

United States, assets under management of

selected direct-indexing providers, June 2021, $bn

Source:CerulliAssociates

300 60 90 120 150

JPMorgan Asset Management

O’Shaughnessy Asset Management

Envestnet

Natixis

Columbia Threadneedle

Fidelity Investments

BlackRock (Aperio)

Morgan Stanley (Parametric)