Spurred by a desire for improved returns and concerns about growing liabilities and disappointing performance in their traditional assets, more Asian institutional investors are pushing into alternatives, according to a new research report from Cerulli Associates.
In its latest publication, “Asia-Pacific,” Cerulli found that some institutions in Korea, Taiwan, Malaysia, and Singapore are setting specific investment goals for alternative investments. At the country level, the report found that Taiwan is motivated by underfunding of its pension liabilities. Underperformance by the Korea Investment Corp.’s direct investment program has prompted the $72 billion sovereign wealth fund to refocus the program on derivatives, Chairman and Chief Executive Hongchul Ahn said in a Dow-Jones Private Equity Report.
Thus far, the KIC has invested roughly $1 billion in direct private-equity deals and committed an additional $1.3 billion to private equity funds, LBO Wire reported in September.
Cerulli expects the trend to widen. “Across the region, investments in alternatives will proceed at different paces of allocation and levels of sophistication from market to market and institution to institution, but they will continue gaining strength as the hunger for returns persists,” the report concluded. “Competition in this space will only get stiffer as more asset managers try to get a slice of this increasingly attractive pie. Failure to build and position expertise in this space will be costly for managers that have not already done so.”
Korean institutions are pushing the most aggressively into alts, with many seeking a 20% minimum allocation before 2020, Cerulli said. Disappointed by low yields, the Korean government has instructed its state pension funds to boost their allocations to overseas and alternative investments by two to three percentage points. This push was spurred by reports of higher returns the Korea Teachers Pension Fund and the National Pension Fund earned on their alt investment portfolios in 2015, relative to other asset classes, Cerulli said.
At the product level, the growth and increasing maturity of smart beta solutions is making multi-asset class (MAC) investing more popular as well. For example, Taiwan’s second-largest pension scheme, the Public Service Pension Fund (PSPF), recently invited bids for its first global multi-asset mandate, said Olivier d’Assier, Asia-Pacific managing director at Axioma. Mainland Chinese insurance companies, meanwhile, are looking at asset-backed securities, although they expect to maintain a heavy exposure to traditional fixed-income instruments.
While the Cerulli report shows it’s gaining ground noticeably of late, the Asian attraction to alternatives is not new.
As early as 2001, Asian investors showed an interest in hedge funds largely as a result of large losses they suffered during the Asian financial crisis, the collapse of property values in Hong Kong and elsewhere in the region, and the 2001 stock market decline.
Previously, these funds were off the radar screens of many Asian investors because the Hong Kong property market was delivering returns of 18% to 19% a year. Additionally, the regulatory environment in Hong Kong and Singapore was not hospitable to hedge funds, which private banks and advisers were selling primarily to wealthy individuals and smaller institutions. By 2001, however, hedge funds were delivering less volatile performance and beginning to attract larger institutional investors.