Lion City institutions most open to new strategies

Singaporean institutional investors are keener to adopt certain new strategies than their regional peers, according to a survey by fund house Allianz Global Investors.

Compared to their peers elsewhere in Asia, Lion City institutions are particularly interested in adopting new approaches, such as dynamic asset allocation (100% versus 54%); risk-driven investment strategies (70% versus 44%); duration management (80% versus 54%), liability-driven investment (40% versus 20%) and increased asset diversification (70% versus 51%).

Moreover, some 77% of Chinese institutions are willing to adopt duration management and dynamic asset allocation, while 62% will focus on increased asset diversification.

Only 36% of Japanese institutions plan to employ dynamic asset allocation measures and 28% say they are looking at risk-driven investment strategies.

Unsurprisingly, this rise in risk appetite is fuelled by institutional investors’ desire to shift out of fixed income and into equities amid fears that interest rates will eventually rise.

Out of the 400 institutions surveyed – of which over 100 are in Asia – 25% cite rising interest rates as the biggest threat to fund performance over the next three years, while 20% say tail risk is the greatest hazard.

“[Institutional investors] have concerns about rising interest rates, which will eventually hit sovereign bonds,” says Elvin Yu, head of institutional business for Greater China and Southeast Asia at Allianz GI.

Opinion varies on when the US government will start tapering its quantitative easing programme, with some institutions anticipating it won’t begin until 2015 or even 2016.

As institutions overwhelmingly expect global equity markets to generate positive returns over the next three years – some 90% of respondents believe this to be the case – Allianz GI notes the shift into equities will happen in the next several years.

Yet while global institutional investors view equities as necessary to generate returns in the next few years, they also cite volatility as a chief concern.

“On the one hand they know [equities are] something they should look into, but they’re still concerned about market volatility,” Yu tells AsianInvestor. “They can’t avoid risk. So they have to take smarter risk.”

There are opportunities in both developed- and emerging-market equities, Yu says, noting that Allianz GI has a “balanced view and believes developed-market equities still have momentum”.

“European equities are holding up quite well, and from a valuation standpoint, for long-term institutional investors, Europe is real bargain right now,” he adds.

So too, Yu argues, is North Asia compared to Southeast Asia, which he views as overbought. Abenomics in Japan, high automotive consumption in Korea, and the booming IT/technology industry in Taiwan, coupled with higher-than-expected GDP growth in China – 7.8% in the third quarter – all make North Asia an appealing option for equity investors, he says.

Meanwhile, regulatory costs are a major concern for institutional investors, with just over half of those surveyed expecting the policy climate to become less favourable in the next three years.

Asked which regulatory and governance factors will affect returns the most, 34% cite government regulation and 31% new capital controls and investment requirements. Nearly 27% of institutions are concerned about the political and regulatory environment affecting their ability to meet investment targets.

Institutions surveyed include sovereign wealth funds, corporate and state pensions, insurance firms and family offices.