With US$30.5 trillion in total assets and expected growth of 5.0% per annum, APAC institutional investors are movers and shakers in the investment world, both regionally but also increasingly on the global stage. The focus on yield grows more acute amidst the “lower for longer” outlook. Coupled with greater volatility on the horizon, both economically as well as politically, efficient use of resources is the rule of the game – be it in risk budget, fees or time utilisation.
From large sovereign wealth funds (SWF) in the region to pension funds in Southeast Asia, investment philosophies are slowly shifting from pure asset allocation to a more risk focused approach. Investors are increasingly looking at returns on a risk-adjusted basis and are growing more receptive to absolute return, benchmark free strategies. The willingness to move up the risk curve is reflected in their investment decisions from core fixed income to alternatives on the fringe.
The dominance of fixed income (FI) strategies in APAC outsourced assets is evident from our proprietary data platform, Institutional Money in Motion (iMiM) APAC, where cumulative net flows into FI from 2013-H1 2016 outstrips that into equity, the second best-selling sector, on a 4:1 basis. If we look more closely at the investing trend within FI, we noticed institutional investors have crept up the credit risk spectrum as they pivot away from government bond towards riskier strategies like corporate/credit and emerging market. Investors are also willing to embrace more niche strategies in their hunt for yield as we see absolute return, unconstrained strategies gain momentum.
Likewise, interest in alternatives strategies show no sign of abating as investors seek illiquidity premiums in a yield-starved world. Our APAC iMiM data shows a resurgence of interest from SWFs in hedge funds and we see that reflected in mandates handed out by other institutions such as Korea’s National Pension Fund (NPF) and Korea Post Savings Bureau. Infrastructure debt and private equity are amongst the top three asset classes which APAC insurers have indicated their interest to invest in; and Chinese insurers have continued their relentless pursuit of direct real estate deals into 2017. However the way investors choose to access alternatives differs. The approaches vary from direct access, setting up subsidiaries, investing in alternative firms to complete outsourcing to external managers.
The focus on efficiency gains has also led to multi-asset funds seeing interest from a plethora of investors, from official institutions in Singapore to DC pension funds in Australia. Some view it as an equity replacement tool and others as a way to completely outsource investment decisions. Net flows are still small at the moment relative to fixed income but we see steadily climbing inflows, with flexible unconstrained strategies most in favour. Further, interest in multi-asset is not restricted to small investors as Japan’s Government Pension Investment Fund (GPIF) announced its decision to award multi-asset mandates in 2014 followed by Taiwan’s state pension, Public Service Pension Fund in January 2017.
Lastly whilst investors are happy to pay for true alpha and illiquid access, we expect investors to keep a tighter lid on the investment fees to extract maximum value from third party managers. This is giving rise to smart beta investing, as investors seek cheaper ways to access factors such as low volatility, value and momentum to name a few. We have yet to arrive at a definitive sizing of the smart beta market in APAC but our research in EMEA suggests the European smart beta market is booming, with assets worth EUR224 billion as of end 2015 and an 23% annualised growth over the last two years. Smart beta strategies are still at an infancy stage in Asia with single factor strategies rather than multi-factor taking root. But with the overhang of a low yield outlook, we expect more institutions to follow the footsteps of Taiwan’s Bureau of Labour Fund (BLF) and Thailand’s Government Pension Fund (GPF) to increase allocation in this space.
Hunt for yield has become a central theme for investors as the global economy slows. The choices available to investors are either to accept a lower return, higher risks or revamp their investment approach by using their time, risk budget and fee resources more effectively. As the macro environment puts more demand on resource utilisation, expect the same scrutiny to translate to their demands on external managers too.
Yoon Ng is APAC Director for Spence Johnson and will be presenting Leading from the front: How are large institutional investors determining the future investment trends in the region? at FundForum Asia taking place in Hong Kong 24-26 April 2017.