How Asian institutions are raising their passive exposure

Asian investors are slowly following a global trend towards raising their exposure to passive investments, with smaller institutions now seen increasingly making a push in this direction.

BlackRock, which has engaged in a price war with rival Vanguard in recent months, estimates $243 billion was invested into exchange-traded funds (ETFs) across Asia Pacific at the end of 2015, while Hong Kong alone boasted $2.24 trillion in overall fund AUM at the end of 2015. BlackRock also took a net $580 million into passive mandates in the region last year.

ETFs have existed for about 15 years in Asia, but only gained real traction since 2010, initially with institutional investors. The Labor Pension Fund for example, one of the six funds operated by Taiwan’s Bureau of Labor Funds (BLF), started to use the first passive investing index mandate in 2011.

Huang Chao-hsi, director general of the state institution, told AsianInvestor: “Currently, BLF gives both active and passive investing mandates [but] in the future, with the improvement of domestic managers’ index investment capabilities, we’ll gradually increase the ratio of relative-return strategies in domestic mandates."

BLF’s internal team has been using ETFs to invest into equity and fixed income markets to rapidly build up market positions. Huang added that ETFs aren’t just cheap; they also offer investment flexibility, rapid asset allocation and convenient trading.

That’s a notable product advantage, noted Kevin Hardy, head of beta strategies for Asia Pacific at BlackRock. “Last year many large asset owners such as sovereign wealth funds had currency challenges or saw the price of oil collapse," he added. "They turned to ETF assets they held to redeem these assets.”

Asset owners contacted by AsianInvestor didn’t reveal exactly how much they invest into passive funds, but a leading funds consultant estimated the region’s largest asset owners have around 20% of their AUM in passive funds, on average.

Tracking large-caps

The region’s asset owners have largely focused on using passive mandates for large, transparent markets such as US or European blue-chip equities – markets in which it is hard to outperform.

Heman Wong, executive director at Hong Kong’s Hospital Authority Provident Fund Scheme, said his fund had about $600 million invested into passive allocations into Japanese and US large-cap stocks, run in segregated accounts. “We have had quite some saving in fees over the years, in the region of $1 million to $2 million a year,” he told AsianInvestor.

To be sure, Deborah Bannon, investment market business leader for North Asia ex-Japan at consultancy Mercer, felt demand among larger institutional investors for passive investing may not continue rising, noting they are focusing more on alternative investments.

But it’s a different story for smaller institutional investors. “I still see continued demand for passive among smaller to medium institutional clients without dedicated in-house teams to manage portfolios effectively,” Bannon told AsianInvestor.