Asset owners plan 2017 rotation into risk assets
Alternative investments and stocks will see big inflows from Asian asset owners this year, according to an annual global survey* by Natixis Global Asset Management due for release today.
The French firm polled some 500 institutions globally with $16.5 trillion in assets under management, of which 62 were based in Asia, accounting for $3.3 trillion of the total AUM.
Among other things, the extensive research also collated institutional views on active and passive fund management; environment, social and governance (ESG) investing; and investment outsourcing.
Allocation shift
Asian institutions said they would raise their allocation to alternatives to 22.7% from 19%, and to equities to 32% from 30.2%. These exposure shifts are to come mainly at the expense of fixed income (which is set for an allocation drop from 39.1% to 37.1%), cash (6.1% to 3.8%) and real estate (5.4% to 4.4%), found the report. (See figure below.)
As for specific asset classes, there is a strong flow going into illiquid investments such as private equity and infrastructure equity and debt, said Fabrice Chemouny, global head of institutional sales at Natixis Global AM.
“I've seen more RFPs for infrastructure mandates,” he told AsianInvestor. “The US is a big destination, but they are also looking at Europe and emerging markets.”
He is also seeing a greater focus in Asia on renewable energy and ESG-type investments. This is fairly new in Asia, with Japan leading the way, he added.
“We used to say that ESG is a risk reducer, and now that is being confirmed. Investors don't want to have potentially problematic assets in their portfolio, and they are seeing that performance-wise an SRI [socially responsible investment] approach can deliver.”
The most obvious driver for the stronger focus on risk assets is that Asian institutions are seeking higher returns, noted Chemouny, but they are now more cognisant of risk than in the past.
Indeed, 77% of Asian survey respondents (75% globally) thought individual investors might be taking on too much risk in pursuit of yield.
When it came to the question of active versus passive strategies, institutions' views appeared slightly contradictory.
Some three-quarters (73%) of Asian respondents feel the current market environment is likely to be favourable for active portfolio management in 2017. Interestingly, however, they expect to have reduced their allocation to active investments by 1.6% three years from now.
Differences in Asia
Overall, Asian institutions' responses were largely similar to those for their global counterparts. But there were several areas in which they showed significant variance.
For instance, only about half (48%) of the Asian respondents said they found it challenging to balance growth objectives against short-term liquidity needs, as compared to 60% globally.
Chemouny said demographics could at least partly explain this. Western countries generally have a higher ratios of retirees to young and working-age people than emerging markets. Hence most Asian pension funds can invest more in longer-term illiquid assets because they do not need to make payouts as regularly as their peers in Europe or the US.
Japan is one notable exception, noted Chemouny, as it is more like Western markets in terms of demographics than many Asian countries.
Still, as a general rule, Asian institutions are readier to invest in longer-duration assets than in the past, he added; Korean and Japanese asset owners are more willing to accept illiquidity to obtain higher returns.
Manager selection
Another area of variation was selection of asset managers, which more institutions in Asia cited as a challenge (42%) than their peers globally (34%). Chemouny put this down to the fact that Asian asset owners are increasingly investing overseas, but are not as familiar with global asset managers as Western investors are.
In addition, Asian institutions don't tend to use investment consultants as much as their global peers, he noted, although that is changing. A growing number of the big funds in Asia are employing the likes of Mercer, Russell Investments or Willis Towers Watson to help with manager research, argued Chemouny.