Asset owners shift to alternatives as AUM grows

A new survey of asset owners based in Asia ex-Japan finds institutional portfolios are growing, and diversifying.

Speaking at the recent AsianInvestor Investment Summit in Hong Kong, Abhi Shroff, Singapore-based vice-president at Greenwich Associates, notes that outsourcing of investments to third-party fund managers is also on the rise.

According to the consultancy’s survey of 200 Asian institutional investors, total AUM grew 20% year-on-year to $7.4 trillion. Assets outsourced to external managers grew 40% to about $1 trillion. And the big got bigger, as the largest 40 asset owners now account for 90% of assets, and the top 60 account for 90% of outsourced mandates.

(AsianInvestor also ranks the top 200 asset owners in Asia ex-Japan. Our total figures are roughly double Greenwich’s figure, due to different handling of foreign reserves, and our inclusion of commercial banks’ cash and securities. The 2011 version of the AI-200 will be published in our July magazine. For example, Greenwich says Chinese institutions account for about $3 trillion of AUM. AI’s data, which is now about a year out of date, had Chinese institutions holding $8.3 trillion of investible assets. AsianInvestor’s figures correspond more closely to Greenwich’s for markets where foreign reserves and commercial banks are not as pronounced.)

Greenwich says Chinese institutions have now outsourced about $378 billion of assets, while Koreans have outsourced $246 billion. Hong Kong/Macau accounts for another $167 billion of outsourced mandates, Singapore $98 billion, Taiwan $66 billion and Malaysia $43 billion. India, despite having a large pool of assets, has outsourced zero overseas.

Greenwich also estimates, based on interviews with some of these investors, that sovereign wealth funds and state pension funds are the main sources of assets for fund managers, with on average 35% and 23% of their AUM outsourced, respectively. Insurance companies are also major clients, with 20% of AUM mandated. Central banks and commercial banks, although their AUM is vast, outsource no more than 5% of assets.

This reflects the type of fund-management services required. SWFs are the only entities investing in single countries. They and pension funds are looking more at pan-Asia or global emerging-market mandates, which also often require a specialist.

In general, Asian investors want to increase their exposure to equities and alternative investments. Average allocations to international equity grew YoY from 7% to 11%, while domestic allocations rose from 5% to 9%. Alternative-investment allocations rose from 6% to 9% of total AUM. Investors have drawn down from domestic bonds and cash, while leaving international fixed income levels relatively steady.

This is in contrast to most institutional investors in the United States, Europe, Australia and Japan, which are de-risking and increasing exposure to fixed income, either as defined-benefit plans close or as they shift to liability driven investment strategies. Asian investors, meanwhile, are looking to equities and other instruments to protect themselves against inflation, as well as to achieve outperformance.

Greenwich finds that the biggest demand for outsourcing from Asian investors is to managers in: global fixed income (a top-3 priority for 25% of institutions), Asia ex-Japan equities (21%), emerging-market debt (18%), emerging-market equities (14%), Asian fixed income (13%) and passive equity instruments or funds (10%).

Greenwich also finds heightened appetite for alternative investments, particularly hedge funds. Shroff notes there is some appetite for private equity, but the biggest SWFs and pension funds often have their own principal investment teams and go direct, whereas they are unlikely to run their own hedge strategies. So they need to add single hedge-fund managers or funds of hedge funds.