AI300: Uphill climb ahead for top insurers, pensions

Asia Pacific’s largest asset owners grew their assets under management (AUM) at a rapid clip during 2017, but pension funds and insurers are more likely to fall afoul of market volatility this year and will need a broader array of investment instruments.

The top 50 participants of AsianInvestor’s AI300 latest survey of the region’s largest asset owners grew their assets under management (AUM) by 7.67% in 2017. That greatly outpaced the 2.27% rise they had recorded in 2016.

Commercial banks and central banks stood as the largest overall investors in this bracket, while insurers and pension funds comprised about 20% of AUM. Indeed, insurers were among the worst performing asset owners among the top 50; their combined AUM grew by just 0.41%, to $3.4 trillion.

The meagre rise was almost entirely the result of the impact of a falling yen. Japanese insurance companies comprised two thirds of insurer assets in the AI300 and were heavily represented in the top 50, but their AUM is mostly based in yen, which dropped by 11.5% against the dollar between October 2016 and September 2017.

The AI300 survey is quoted in dollars, and on this basis Japan’s insurers’ AUM contracted by 7.38%, nearly cancelling out the double digit growth among insurers from the rest of the region. For example, Dai-Ichi Life Insurance’s AUM grew by 3.2% on a yen basis but fell by 7.4% when converted to dollars, which led the insurer to fall from sixth place to 35^th in our survey.

Currency weakness aside, Dai-Ichi Life Insurance enjoyed decent yen-denominated AUM growth in large part because of its equities investments.

“Market price yield of marketable securities in [fiscal year] 2017 resulted in the highest result of 12.1% in domestic stocks,” a Dai-Ichi Life Insurance spokesman told AsianInvestor.

The Nikkei 225 index grew by 23.7% between September 2016 and September 2017, surpassing the 20,000 mark in June 2017 for the first time since December 2015.

The insurer’s returns from domestic stocks more than made up for the miniscule 1.33% that it received from its holdings in foreign corporate bonds, the spokesman added.

PENSIONS GROWTH

Pension funds in the top part of the AI300 recorded more vigorous growth, with their combined AUM expanding 6.57% to hit $2.7 trillion.

This was led by Japan’s Government Pension Investment Fund (GPIF) and Korea’s National Pension Service (NPS), the world’s largest and third-largest pension funds, respectively. Both benefited from the buoyant returns in global equity markets throughout 2017.

GPIF’s AUM increase was in large part down to its investments in foreign and domestic stocks in 2017, especially domestic equities, said a GPIF spokeswoman. It allocated 25.1% of AUM to local stocks in 2017, ensuring an 18.7% growth in AUM on a yen basis. Even discounting the deteriorating exchange rate, GPIF recorded 6.51% asset growth on in dollar terms to $1.4 trillion, enabling it to move up to fourth place in the rankings.

Meanwhile NPS grew its AUM by 15.7% last year to $590.2 billion, which helped it to jump four places to 13^th position overall. It also benefited from domestic and global equities investments, which returned 25.88% and 10.62%, respectively. The Korean Composite Stock Private Index (Kospi) rose 23.2% in 2017, and the MSCI Korea Index returned 47.8% in the same period.

Overall, NPS’s investment returns were 7.26% in 2017, its highest result since 2010.

MARKET AND GOVERNANCE TROUBLES

While 2017 provided Asia Pacific’s largest asset owners with a benign environment, this has changed into stormier conditions this year. The Nikkei 225 and the Kospi have respectively fallen 3.85% and 7.52% year to date, and low interest rates and the potential for an economic slowdown have only added to asset owners’ concerns.

It’s led also asset owners to increasingly consider investment possibilities outside traditional asset classes.

“Based on the possibility of domestic low interest rate environment continuation and the possibility of the future economic slowdown in the US, we will continue expanding exposure to fields that are low correlated with traditional assets such as infrastructure and real assets,” the Dai-Ichi Life Insurance spokesman told AsianInvestor.

GPIF is also aiming to grow its exposure to alternative assets, announcing its first infrastructure mandate in January, after issuing a request for proposal for alternative assets in April 2017. The pension fund’s chief investment officer Hiromichi Mizuno told AsianInvestor in March that GPIF is prioritising long term capital risk investment objectives over immediate investment returns.

Korea’s NPS is having to manage a tougher investment environment with internal staffing difficulties. The pension fund appointed Lee Soo-cheol as acting CIO in July, which made him the third executive to hold the position since July 2017. The year’s tougher investment environment looks set to test whether NPS’s latest investment head who can navigate the country’s politics and make the strategic shifts necessary to navigate increased market volatility, trade frictions, and tightening Western monetary policy.