Eugene Kim, CIO at Bank of Korea
Generating returns has been a challenge for several years with global interest rates having stayed rooted at record lows, forcing institutional investors to seek alternatives to sovereign debt.
Diversification has become the key watch word, although different investors have different ideas of how to reshuffle portfolios in the low-yield environment.
Three institutional investors – The Bank of Korea, insurer Ageas, and the Hospital Authority Provident Fund Scheme, which manage some $370 billion between them – discussed their allocation plans at AsianInvestor’s eighth annual Asia Investment Summit in Hong Kong last week.
The Korean central bank, which manages $330 billion, has been expanding outside traditional government bonds and putting more money to work in corporate fixed income and equities, and is mulling credit markets, Eugene Kim, director and CIO, told attendees.
However, Bank of Korea will only consider high-grade bonds such as single-A or higher, Kim stresses. “We cannot go into high-yield bonds,” he notes, citing liquidity concerns.
BOK is also eying emerging markets, equities and Chinese fixed income, marking a continued effort by the central bank to diversify its portfolio, as it bumped its equity exposure to 6% in April, from zero in 2007, and also recently increased emerging market currency and bond investments.
While regulatory restrictions make it difficult for the bank to invest in hedge funds or private equity, the bank’s head of reserve management, Choo Heung-Sik, recently told AsianInvestor it would keep an open mind on alternatives and welcomes hearing about opportunities in the asset class.
Belgian life insurer Ageas, which oversees some $33.2 billion in Asia, has doubled its alternative exposure over the past five to 10 years, notably in property and infrastructure, and expects this trend to continue, director Jeffrey Tan told attendees.
The insurer also likes the renewable energy sector, he adds. "We’re currently focusing quite a bit on properties, infrastructure and renewable energy,” Tan says, aside from its interest in fixed income.
Similarly, after investing heavily in bonds over the past few years, Heman Wong, executive director at the $5.7 billion Hospital Authority Provident Fund Scheme, is evaluating how to re-allocate its money should interest rates rise later this year, noting that funds of funds seem like an appealing option.
“I am not happy with low interest rates. I think manipulation of the curve makes it more risky for us as bond investors,” Wong says. “The moment the yield curve steepens, which it will do I believe [by year-end], this will trigger a sell-off and price depreciation for bonds.”
As such, the Hospital Authority is mulling funds of funds and global Reits, with its current global Reit allocations at 50% to the US, 30% to Europe and 20% to Asia.
The correlation between Reits and equity markets is quite strong, Wong adds, making Reits attractive now given that equity yields are higher than for bonds.
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