Amando M. Tetangco, Jr: Recognizing Success and Managing Black
Swans, Elephants in the room and Grey Rhinos
Speech by Mr Amando M. Tetangco, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the
central bank of the Philippines), at the FMAP 2016 Awards and Fellowship Night, Makati City,
21 July 2016.
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I am pleased to join you tonight as we recognize those whom the industry has chosen as the
best in 15 award categories. To the awardees, allow me to extend my early congratulations for
a job well done. I know that being "recognized by peers" is one of the strongest motivations for
anyone to be the best that he can be at his chosen craft. So, keep up the good work!
Tonight's celebration is also about the fund management industry itself, which has grown
consistently over the years. If we count only the trust institutions that report to the BSP, assets
under management as of end March 2016 stood at P2.7T. FMAP estimates that if the other
asset management companies are included, this figure will grow to almost P4T, covering
174 peso-denominated fixed income and equity funds and 52 foreign denominated funds.
The BSP expects these numbers would continue to grow moving forward. The Philippines'
strong economic growth nestled by a stable inflation environment, robust external liquidity
position, and a sound banking system, could only further boost the market's confidence in our
domestic financial markets.
The global investors have now become more discriminating, their search for yield during this
extended period of low global interest rates is balanced by the need for stability of returns. The
local investor is also becoming more selective and growing in sophistication, gaining more
willingness to try newer products to meet specific needs.
With this operating framework, the FMAP and its members must certainly evolve with the
changing needs of your constituents.
It was "Uncle Ben" (Ben Parker, the step-uncle of Spiderman) who said that "with great power
come great responsibility". I cannot think of a greater responsibility for a market practitioner
than to be entrusted with managing the hard-earned funds of others. Funds that will allow your
clients to raise and educate their kids, buy their dream home, care for aging parents, go on
that much awaited vacation or save for a stress-free retirement.
There are many issues that we could discuss at length with respect to this "greater
responsibility", but for tonight, allow me to only (and briefly) raise just two of these issues.
First, financial consumer protection is not simply a popular advocacy, it is one which is central
to prudential oversight. Several studies have shown that the disruptions of the Global Financial
Crisis were particularly costly because investors found themselves unprepared for the market
reversal. In many cases, these investors were enticed by the returns promised by agents
without necessarily understanding the risks that they were taking.
In other cases, financial products were so novel that the industry itself did not fully envision
how and thru which channels the risks would materialize. To be fair, our technical models were
imprecise. But we must also admit, with some dose of humility in hindsight, that, collectively,
the markets underestimated the risks and their consequences.
Because of the agency nature of your business, the industry cannot thrive without considering
the specific needs of each client. Your clients must also be empowered so they could better
define their requirements and how their financial resources could be optimized to meet these
needs. Such symbiotic relationship therefore necessitates that we adhere to the standards on
financial literacy as a pro-active initiative and consumer redress as a remedial measure, where
warranted.
The second issue I wish to cover is this - the asset management business has systemic
implications.
Consider the two basic types of agency agreements 1) the passively managed funds,
performance of which mirrors or closely tracks that of a specific benchmark, and 2) the actively
managed or specialist funds, which are not linked to a specific benchmark. There are positives
to this dichotomy. Actively managed funds have the advantage of potentially higher yields while
passive funds provide lower costs. The downside however is that shifting towards
higher-yieldbut-illiquid exposures exacerbates the vulnerability of financial consumers towards market risk,
while the ease of passive funds also nurtures "herding" behaviour as well as correlated market
movements.
These notions are confirmed by empirical work at the BIS,1 among others, that have shown
that "asset managers in EME asset markets tend to behave in a correlated manner and that
investment flows to asset managers and asset prices amplify each other's fluctuations".
This is why my second message for the industry is this: Do not be oblivious to financial stability
issues.
Ladies and gentlemen, we "live" in an industry where "change" is literally a minute by minute
phenomenon (i.e., not only in financial rates and prices but also in market sentiment). But there
are also those tail risks, the "Black Swan" risk, as popularized by Taleb.2 Moving from "the
elephant in the room", Wucker recently talks of the "grey rhino" as the highly probable high
impact but neglected threat.3
I am not sure how swans, elephants and rhinos come together, but I am certain that we do not
want any of what they represent to come true. We can look towards regulation to manage
market conduct within acceptable norms, but, in the end, it will have to be the market
practitioners who need to be committed to upholding the standards.
Ladies and gentlemen, the recognition announced tonight confirms my view that FMAP and its
members cherish the higher goals we set for ourselves and your chosen business.
On the part of the BSP, we recognize that investors and fund managers should have the
leeway to invest in alternative instruments across jurisdictions or in different currency
denominations. Within the bounds of client suitability and effective management of risks, we
are prepared to revisit existing regulations and make the needed changes. This will not only
deepen the capital market but more so provide investors with more choices within the perimeter
of tolerable financial risks.
The BSP will always be your partner and I am sure FMAP stands ready to always join us in
the journey for professional excellence, for consumer protection and for financial stability.
Congratulations to the asset management industry. Congratulations to the awardees.
Thank you and good evening.