Why total portfolio allocation could be 'game changer' for APAC asset owners

The largest asset owners across Asia Pacific have a lower allocation to alternatives, but a new portfolio construction approach could help change that.
Why total portfolio allocation could be 'game changer' for APAC asset owners

Asia Pacific’s largest asset owners have a relatively lower allocation to alternatives compared with their global peers, but a different portfolio construction methodology - total portfolio approach (TPA) - could change that, senior executives at investment advisory firm WTW told AsianInvestor.

The lower alternatives allocation trend is especially true for Asia Pacific’s largest pension funds, and to a lesser extent sovereign wealth funds. That's according to the 2023 edition of the Asset Owner 100 study on the largest 100 asset owners worldwide by WTW’s Thinking Ahead Institute.

According to the study, on average Asia-Pacific asset owners have 17.1% of their portfolios invested in alternatives, while the global average was 27.1%, with North America at 35.4% and Europe, Middle East and Africa (EMEA) at 29.7%.

Source: Asset Owner 100 2023, Thinking Ahead Institute
Jayne Bok, WTW

Jayne Bok, head of investments Asia at WTW, noted that Asia Pacific is a very diverse region where markets were emerging or have only just exited emerging status.

“Any emerging market asset owner will start with what is close to home. And your first area of diversification will be global markets but on the listed side,” Bok told AsianInvestor.

Among the globe’s 100 largest asset owners in the study, Asia-Pacific asset owners account for 33.7% of the total assets under management (AUM) in the study. That's on par with North America at 33.9%, while EMEA accounts for 32.4% of total AUM.

Source: Asset Owner 100 2023, Thinking Ahead Institute


Bok said there is at least a 10-year gap in terms of the evolution of alternatives in Asia-Pacific portfolios because of a later entry into the private market.

Another related factor for this scenario is that many of the asset owners’ funds in Asia Pacific are not as mature as their global peers.

Furthermore, their growth rates are faster, which means that the percentage that they would have to keep increasing to catch up on alternatives portfolio share would require quite significant amounts of outflow. A difficult task, Bok pointed out.

“If it is a mature market where the inflows and outflows of the pension funds are about the same, and at a steady state, it is easier to increase a fund’s allocation, but when your asset base is growing year by year – and at the same time you are trying to expand your allocation – that is quite challenging,” she explained.


Marisa Hall,
Thinking Ahead Institute

A factor that might make alternatives a more attractive asset class for Asia-Pacific asset owners is the emergence of the total portfolio approach (TPA), according to Marisa Hall, head of WTW’s Thinking Ahead Institute.

What TPA means for alternatives is that asset owners are no longer thinking about asset classes as separate buckets, but instead thinking about how every unit of capital in the fund competes for the best idea regardless of what asset class it fits into.

“TPA could be an absolute game changer because you are thinking more about the reference portfolio, and about what risk and return profile that best suits your fund. This makes you laser-focused on meeting investment and sustainability goals. It is the competition of capital for the best ideas to meet that risk and return profile that really matters,” Hall told AsianInvestor.

Bok explained that TPA has large proponents in Asia Pacific, including NZ Super, Australia’s Future Fund and Singapore’s GIC. Among both larger and smaller asset owners, WTW is seeing increasing interest for the TPA model.

Still, it is unlikely that the alternatives gap between asset owners in Asia Pacific and especially peers in North America will close entirely over the next decade. Here, the abundance of US-based alternatives managers, of which some are only US-focused, will be a factor.

“This familiarity bias, or home bias, means that there are just fewer managers that will make it all the way to Asia. With that in mind, there will always be a little bit of that dynamic going on, but two asset owner groups should get closer at least,” Bok said.

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