Asset owners “investing more opportunistically”

Asian asset owners are growing more inclined to make short-term trades in response to market events such as Britain’s vote to leave the EU, says a senior JP Morgan Asset Management executive. This increasingly opportunistic approach is also seen to be having an impact on how investors pick managers.

Another major trend is that insurers – and increasingly other types of asset owners – in the region are seeking high-quality but higher-yielding investments such as illiquid private credit, noted Rachel Farrell, head of sovereign and institutional strategy for Asia Pacific ex-Japan at JP Morgan AM.

Institutions are trading more actively on shorter-term opportunities where they feel they can identify clear anomalies, said Hong Kong-based Farrell. “Historically, asset owners invested based on fundamentals … but today they may be more willing to take a higher margin of risk.”

This is driven by rising global volatility, she said, and many institutions are now looking to assess how individual events – such as the Brexit referendum on June 23 – may impact their portfolios.

Farrell is seeing more asset owners making trades in reaction to such events – something they might not have done in the past.

“Not everybody will do this, but those sophisticated institutions with sound internal capability are looking to invest more opportunistically on shorter-term opportunities or mispricings, effectively taking on more active positions,” she added.

This shift in approach also influences the way these institutions are outsourcing investments, said Farrell. Now they increasingly look for external managers that can trade around short-term opportunities, in addition to strategically allocating to managers as providers of long-term return.

This may help explain why some Asian asset owners are raising their allocations – for the first time in some cases – to hedge funds, which tend to be able to react quickly to market moves. Korea Post and Korea’s National Pension Service are two institutions to have recently made moves in this area.

While Brexit may have encouraged institutional investors to become more opportunistic, it also reinforced the trend towards seeking high-quality, higher-yielding assets, by seeking to benefit from illiquidity premiums, noted Farrell.

For instance, private credit has been an area of focus this year for most Asian insurance firms looking to broaden their fixed income allocations – these assets can provide higher returns in exchange for lower liquidity. JPM AM targets annual returns after fees of 10-15% across a range of strategies.

In fact, Cambridge Associates published research this week showing that endowments allocating 15% or more to private investments tend to record higher overall portfolio returns than those with smaller allocations.

Interest in private credit is also spreading beyond insurers to other Asian asset owners. China Investment Corporation, the Beijing-based $814 billion sovereign wealth fund, last year identified the asset class as a dedicated strategy, as reported.

Farrell transferred to Hong Kong from Singapore in December 2014 to take up her current role overseeing around 30 client advisers and sales support staff and a 10-strong client account management team on top of that.

The US firm prioritises China, Korea and Australia as the three markets offering the most significant opportunities for institutional business growth in the region.