Asset owners revisit opportunities in today's volatility

February 2016

Persisting market volatility and the economic slowdown in China are creating attractive opportunities for asset owners across Asia Pacific. Pension funds in Asia Pacific are adopting various approaches to tap the emerging opportunities and meet their long-term objectives, State Street’s new Asset Owners Survey shows.

The survey, conducted by Longitude Research, reveals that more than two thirds of respondents in Japan (69%) are seeking higher-risk, higher-return strategies, while their counterparts in Australia, Singapore and Hong Kong are seizing the volatility to de-risk some of their portfolios.

These factors are paving the way for some asset owners to increase their exposure to various alternative investment asset classes where valuations for the long term are looking comparatively attractive.

Our survey finds that over the next three years, at least half of pension funds in the region plan to increase their exposure in private equity (57%), infrastructure (54%) and funds of hedge funds (50%).

Nearly eight in 10 respondents in Singapore and Hong Kong plan to increase their exposure to single-manager hedge funds.

Understanding the challenges

As some asset owners increase their allocation to higher-risk, higher-return strategies, they will have important considerations for their governance capabilities.

Pension funds will be moving away from the more transparent volatility-based risk management with mark-to-market prices and shifting more into mark-to-model, where they have to change their performance and risk metrics.

Only 9% of asset owners in Asia Pacific rated highly the knowledge and expertise of their institution’s governing fiduciaries on alternative assets.

Twenty-seven percent rated them highly for understanding risks facing the retirement fund, but this falls to 22% for their ability to think beyond short-term issues to address longer-term, strategic factors affecting the portfolio.

Only 14% of asset owners highly rated their governing fiduciaries’ ability to accurately assess the performance of external investment managers.

Upgrading governance areas

As asset owners increase asset allocations to less transparent asset classes, including alternatives, there will be greater need to overhaul their governance procedures and frameworks.

A majority will be focused on adjusting responsibilities between the board and management, increasing training and education for the board, giving greater autonomy to the investment function, and improving transparency to members.

Asset owners also require necessary analytics and performance tools to make strategic steps in managing their risks and opportunities.

A majority of respondents in Australia (78%) and a significant number in Japan (46%) will continue to apply risk factor analysis to their portfolio. Meanwhile, more than half in both Singapore and Hong Kong are already utilising such tools but plan to discontinue those as they de-risk.

ESG in the investing landscape

Supporting their commitment to high and sustainable investment standards, pension funds in markets such as Australia (96%) and Japan (73%) have moderate or high interest in environmental, social and governance (ESG) investing over the next three years.

According to the Global Sustainable Investment Review 2014, the sustainable investment market grew from US$13.3 trillion at the outset of 2012 to US$21.4 trillion at the start of 2014 and from 21.5% to 30.2% of professionally managed assets.

Asset owners know that ESG investing can deliver strong, sustainable returns, if applied intelligently. And implementing successful ESG strategies will require a new approach to analysing investment decisions that many pension funds may not be equipped for today.

Pension funds will need front office personnel capable of applying new analytical lenses to select the assets that will perform in the sustainable economy of the future.

This increasing focus on sustainable investing is creating strong demand for managers with capabilities in ESG investing. Sixty-three percent of respondents in Asia Pacific say they would consider hiring a manager with ESG capabilities over one that does not have that capacity.

Thus the region’s pension funds will face huge competition in attracting more specialist talent. Luring the right calibre of staff from high-paying investment banks, asset managers and consultancies into their ranks will not be easy.

Taking ownership

In today’s environment, market volatility can create investment opportunities as good-quality assets at more reasonable valuations become available to investors.

In order to be fully prepared for the challenging and changing investment markets, asset owners must upgrade their governance frameworks and procedures. They must also reconsider their talent acquisition schemes to attract the best talent.

This approach will help them to ensure they will be fully prepared to invest effectively to generate investment returns that will help them to deliver suitable retirement outcomes to their members.

This article was published on Ignites Asia on 23 February 2016.
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