State investors favour Asia over other regions
Despite the weakened outlook for growth in China, state investors globally plan to increase exposure to Asia more than to any other region in the coming three years (see figure below), according to research that will be released today.
Moreover, faced with a challenging investment environment, official institutions globally are adapting their investment and operating models to be more agile, said State Street, sponsors of the study conducted by Oxford Economics in September and October 2015.
The survey of 102 official institutions – central banks, sovereign wealth funds (SWFs) and state pensions – found that 89% of Asia-Pacific respondents and 63% of institutions from other regions are planning to increase their investments in Asia.
The institutions responded anonymously, but the 34 from Asia Pacific can be expected to include the likes of Japan's Government Pension Investment Fund, GIC and Temasek in Singapore, China Investment Corporation and the major superannuation funds in Australia and New Zealand, said Kevin Wong, Asia head of sector solutions at State Street.
As well as making moves to diversify their portfolios, including increasing their allocations to alternatives, institutional investors are placing emphasis on investments in fintech and middle-office risk and compliance systems.
Six in 10 (58%) of the institutions surveyed globally have changed their risk management approach over the last three years. SWFs in particular have expanded the use of risk factor analysis over the last three years (82%, versus 69% of central banks), along with the use of derivatives (64%, versus 33% of central banks).
Seventy-four percent of institutions in Asia Pacific say they are most likely to improve their risk management over the next three years, compared to 61% in Europe, the Middle East and Africa (Emea) and 56% in the Americas. In Asia Pacific, 74% of surveyed official institutions plan to increase their use of currency-hedging strategies (versus 53% in North America and 52% in Emea).
In particular, SWFs and state pension funds are showing strong appetite for alternative investments. In the next three years, 68% of SWFs are looking to increase their allocation to commodities and 88% of government pensions aim to boost their real estate exposure, in the hope of achieving returns that beat equity markets.
Wong said the move towards alternatives was the major investment trend. In Asia, Japanese and Chinese institutions are the most prominent movers into infrastructure, real estate and private equity, he noted. Singaporean institutions are leading the way in Southeast Asia, he added, while Australian super funds want to know the optimal model for allocating to alternatives.
Governance structures are also being transformed, Wong said, with both central banks and SWFs starting to disclose more data about their investment priorities, risks and holdings. About half (52%) of respondents expect to increase the amount of data they disclose and the frequency of their reporting (53%).
Moreover, data management and security are receiving more scrutiny. Many official institutions struggle with ineffective systems, with 71% citing integrating legacy systems as a common problem and only 16% saying their institution is very effective at sharing data internally.
Cyber-security, data warehousing and integrating performance and risk analytics are cited as particular priorities. Some two-thirds (69%) of central banks and 78% of other institutions are investing in upgrading their cyber-security over the next year. Among SWFs, 40% said they were investing in cybersecurity and data warehousing “to a great extent”.
The focus is likely to be even greater in this area following the huge data leak at Mossack Fonseca that emerged this week.
When it comes to investing in talent, official institutions are examining cost-effective ways to do so, such as building their own in-house resources or seeking different relationships with external fund managers. They demonstrate strong intentions to hire in areas such as investment (70%), technology (61%) and risk and compliance (60%).
Wong said Asian institutions were placing more emphasis on investing in risk analytics and compliance than they are in cyber-security.
Broadly, official institutions in the Emea region, particularly those in the Nordics, show the strongest characteristics for collaboration, quick decision-making and effective use of technology. Wong said there was room for improvement on this front in Asia. "Of the 102 respondents, we believe 20 would be in the category of most nimble, with perhaps two or three of those being in Asia.”
Because several Asian countries are still categorised as emerging markets, he says, control is still exercised from the top down and they have to go through many hurdles to get approvals.
Wong said that while the larger and better known Asian institutions were adaptable and collaborative, most had yet to show these characteristics consistently.“The ability to work more collaboratively, internally and externally, and react more quickly goes hand in hand with senior management’s willingness to embrace these ideas.”