Asset owners cite liability worries

Like their peers globally, most Asian institutional investors (55%) are worried about meeting long-term liabilities over the coming years. And yet only half of such entities globally are incorporating asset-liability matching strategies in their portfolios.

These were among the findings of the latest institutional investor survey by Natixis Global Asset Management, which polled 642 firms globally with $31 trillion in AUM, of which 84 were based in Asia.

One reason for this “surprising lack of implementation across the industry” may be a lack of enthusiasm for the tools available, noted the report. More than a third (36%) said they don't have the tools needed to manage their liabilities, while 59% believe the industry has not been innovative in the development of solutions for liability-driven investing.

Another factor may be institutions' optimism they will meet their own long-term obligations, with 87% saying they will do so. But 52% said they felt other asset owners would not be successful in meeting theirs.

Such confidence could be down to the fact that these entities appear to have improved their internal resources on asset-liability management. “It seems they have increased their capacity to analyse their liabilities and to generate revenues to match them,” said Fabrice Chemouny, global head of institutional sales at Natixis Global AM. “There are still some fears around this, but they know better how to solve this issue now.”

However, Asian asset owners lag their European and US counterparts on this front, he conceded.

And they will be applying this expertise to the issue of potential interest rate rises, notably in developed markets such as the US. Asian respondents – in line with their peers globally – are planning to shorten duration or cut fixed-income exposure. Six in 10 asset owners in the region are moving to short-duration from long-duration bonds, and half are reducing their exposure to the asset class.

With regard to other asset classes, Asian investors also agree with their counterparts elsewhere that stocks will be the best performers in 2015, in particular US equities. But the former are more bullish on Asian equities and real estate than their global peers.

Perhaps not surprisingly, Asian institutions differ from those elsewhere as to what is the biggest threat to portfolios, with 18% citing the slowing Chinese economy as their top concern, followed by geopolitical risks. Globally, asset owners named geopolitical risks (17%), European economic problems (13%) and slower growth in China (12%) as the top three threats to investment performance.

Certainly, the survey said that short-term performance pressures seem to be leading investors globally to play it safe and reduce risks in their portfolio in the coming months.

The market environment during the survey this year was very different from that last year, noted Chemouny, citing the current bullishness on the US economic recovery, the turmoil related to Ukraine and other geopolitical concerns, and the low oil price. “We felt investors were happy to take more risk last year,” he told AsianInvestor.

Meanwhile, investors across the board continued to look at alternatives as a growing source of returns and diversification. More than three quarters of Asian respondents considered the asset class as a good source of investment (79%) and potential return (76%).

Clemouny sees as a “dramatic change” over last year the place that alternatives are now taking in portfolios, especially illiquid assets. Now more and more investors are thinking about putting significant amounts in investments such as loans, private equity and infrastructure, he said., not just in the likes of hedge funds.

Meanwhile, Asian institutions continue to have the highest return expectations before inflation: 8.4% annually, compared to 8.2% in the Middle East and 6.9% globally.