Institutional investors in Asia are going against the de-risking trend that has taken hold among their counterparts in Europe and the US by shifting portfolio assets out of cash and domestic fixed income and into higher volatility asset classes including equities, and emerging markets assets and more specialised fixed-income strategies.
In 2010, in the wake of the collapse of equity market valuations that occurred during the crisis, fixed-income investments made up 73% of Asian institutional portfolios. That share decreased dramatically to nearly 59% in 2011 and declined again to 58% in 2012. Meanwhile, equity allocations increased from 13% in 2010 to 22% in 2011 to 26% in 2012.
“These allocation shifts were driven in part by the strong recovery in stock markets from 2010 to 2012,” said Greenwich Associates consultant Abhi Shroff. “However, unlike their peers in the developed west and Japan, Asian institutions were also moving proactively over that period to increase their exposure to equities.”
Growing Appetite for Risk
From 2010 to 2012 Asian institutions’ average allocations to domestic equities increased from 5% of total assets to 10%, and allocations to international equities grew from 8% of assets to 16%. “Underlying these allocation decisions are extremely bullish expectations about future investment returns,” said Greenwich Associates consultant Markus Ohlig. “Asian institutions’ expected rates of return top those reported by institutions in other markets by a wide margin in nearly every major asset class.”
Even within relatively conservative fixed-income portfolios, institutions are forgoing traditional global strategies in favour of more focused and specialized approaches such as Asian fixed income, US bonds, emerging market fixed income, corporate bonds, and high yield. In alternative asset classes, Asian institutions are leaving behind fund-of-fund structures in favour of direct investments in hedge funds and other vehicles.
Challenge for Internal Management Teams
The increasing complexity and changing risk profiles of institutional portfolios could represent a real challenge to Asian institutions, many of which manager sizable shares of their assets internally. Although the share of assets managed internally by Asian institutions has been on the decline for the past two years, institutions in the region still manage approximately 80% of their assets in-house. What’s more, Asia’s smaller institutions have an even higher share of internally managed assets at 94% and have shown no meaningful shift toward more external management over the past few years.
Compare those percentages to those in the US and Europe. Overall, US institutions manage about 12% of assets internally. Even this average makes internal management appear more prevalent than it actually is. In reality, internal management in the US is limited almost exclusively to the largest institutions. In continental Europe, where insurance companies make up a much bigger part of the marketplace, institutions in 2011 managed 51% of assets internally – a proportion that had declined from an average of 70% in 2010.
“Any institution that is attempting to actively manage its own assets for the purpose of generating alpha is competing directly with asset management companies that are more focused on investing, usually better equipped and typically staffed with investment professionals who are better paid and, therefore, are often more experienced,” said Ohlig. “For that reason, as Asian institutions diversify their portfolios, they should consider following the example of their counterparts in Europe and North America by leaning more heavily on the support and expertise of external asset managers and consultants.”
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