Asian asset owners eye multi-asset mitigation

Asia’s leading institutional investors see diversification by asset class as a risk mitigation strategy, despite this indicating they are selectively adding risk to portfolios.

This was one of the key conclusions to emerge from AsianInvestor’s annual survey of our list of the largest 300 asset owners across Asia Pacific by AUM, which was published in the July magazine edition of AsianInvestor.

Some 61% of respondents said they had spent increased amount of time on risk mitigation in the past year, against just 4% who had spent less time on it.

The short-term risk mitigation strategy they are turning to is raising cash levels, which scored 46% as the top answer, against 23% for asset type diversification.

But a dominant 66% pointed to asset type diversification as their leading risk-mitigation strategy over the long term, with the next highest answer (geographical diversification) scoring just 9%.

Adding to the picture, when asked how they expected their asset allocation to change over the next 1-2 years, 65% replied that they planned to increase their international exposure, as against just 3% who said they would reduce it.

Further, with regard to their international exposure, they plan to raise their allocation to equities (48%), alternatives (42%) and fixed income (40%), although a leading 30% also said they would decrease their bond holdings.

“Clearly they are thinking about diversification by asset class rather than by geography per se,” says Sheila Patel, CEO of international for Goldman Sachs Asset Management, which sponsored our survey. “In getting proper exposure to those asset types, they feel it is essential to get the right geographic balance as well.”

She confirms that Asian asset owners are seeking to use multi-asset strategies to mitigate risk. “Institutional clients have expressed a desire for more multi-asset strategies that move dynamically and address risk mitigation in a different way,” she observes.

One offshoot of the search for yield amid rock-bottom interest rates has been an extension into emerging market debt and Asian high yield, she adds. “Now they need products that have fluidity to move among asset classes in a less constrained way,” says Patel.

Clearly evident in the survey was an increased appetite for alternative asset classes, again likely driven by a search for yield. Some 35% of respondents say they plan to raise their alts exposure up to 10% in the next 12 months.

At present, 53% of Asian institutions hold 1-5% in alternatives, by our findings. While 15% say they have no exposure, that is down from 26% in our survey last year.

They are targeting real returns from infrastructure and real estate most of all – consistent with our 2012 survey. But what has changed from last year is that more respondents see hedge funds as desirable than private equity.

“That is a bit different from what we are seeing, particularly in this region where there is more interest in upping private equity allocations,” suggests Patel.

But what is consistent with what GSAM is seeing is that the US recovery has overtaken growth in emerging markets as the investment theme Asian asset owners are most focused on. Rising interest rates came third at 21%.

As for the biggest macro risk they see over the next 12 months, tied in first place was a Chinese hard landing and quantitative easing/inflation. US sequester/politics was third with just 9%.

The results from our survey of the AI300 will be published in the forthcoming October issue of AsianInvestor magazine, which will be available to our online readers in the next few days.

Overall we received a total of 97 individual responses from our survey to September 6. The institutions were spread across 12 Asian markets and included commercial banks, insurance firms, pension funds, official institutions, sovereign wealth funds, central banks and endowments.