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The Origins of PAIF Reinventing Economic Resilience: Asian Financial Crisis

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 recognized 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.”