Raising alts allocation "no silver bullet": Eastspring

The Asian asset management arm of Prudential plans to keep alts at 5% of its portfolio, while the Korean Federation of Community Credit Cooperatives will nearly double its exposure to 15%.

Raising alts allocation "no silver bullet": Eastspring
Kelvin Blacklock is sceptical about heavily raising alternative allocations

Institutional portfolios may need to take on more risk to generate higher returns, but alternatives are not a silver bullet, says Kelvin Blacklock, Singapore-based chief investment officer of global asset allocation at Eastspring Investments.

In the low-interest-rate environment, equities are widely being viewed as a better portfolio component than fixed income. However, allocations to alternatives will remain low at Eastspring, the Asia asset management arm of UK insurer Prudential, says Blacklock, speaking at AsianInvestor’s Asia Investment Summit in Hong Kong last week.

He oversees Eastspring's multi-asset allocation portfolio, which accounts for around a third of its $94.4 billion of assets managed in Asia and includes third-party funds and general account insurance assets.

“We typically put 50-60% into fixed income assets," he notes. "Probably half of that is long-duration assets, specifically to match duration [liabilities], and we then have quite a large chunk of global credit [exposure]”, which is diversified across different allocations worldwide.

About 30% is invested in what Blacklock describes as slightly “risky assets” such as equities, with 7-10% allocated to property and 5% to alternatives, including hedge funds and private equity.

"Moving 60% of assets to fixed income is not going to give a return outcome that most people are comfortable with,” Blacklock says, as some bonds have very low yields, “whereas equity has become much safer in the medium-term horizon”.

Even so, a greater exposure to alternatives is not on the cards at Eastspring, as some products are illiquid and can be hard to value.

“It’s not a silver bullet. It doesn’t solve all your problems,” says Blacklock. “Over the years we’ve dipped our toe in that water and had some success and some failures. We try to find a dislocation in the market and allocate to it, if the price is attractive.”

Yet the Korean Federation of Community Credit Cooperatives (KFCCC) is taking a different approach, by planning to nearly double its allocation to alternatives this year to 15% from 8%, says chief investment officer Jeung Jae-Ho, speaking on the same panel as Blacklock.

It is a big jump for the KFCCC, which had only a 1% allocation to alternatives three years ago. It runs an asset management portfolio of $29 billion, which comes from contributions and fees provided by its credit cooperative members.

It plans to allocate to alternative assets both in Korea and internationally, says Seoul-based Jeung, and already owns properties in the US, in cities such as Chicago and San Francisco.

Another focus point will be on emerging markets, particularly China. The KFCCC has existing relationships with mainland asset managers through an internally-run China fund, and will select one firm to run assets for its main portfolio, says Jeung.

Trevor Persaud, managing director for Asean and Taiwan at Russell Investments, believes diversification should be a key factor when building a portfolio. It all depends what you're already exposed to.

“As a multi-asset manager, clients always ask ‘what’s the next big trade?’, or ‘what’s the next big fad?’ says Singapore-based Persaud, another of the panelists. “The correct answer to that question is ‘what are you already invested in, and to what extent?’”

Even though the adage that correlations go to one during a crisis has proven to be true, it “is not the reason not to diversify”, he adds.

¬ Haymarket Media Limited. All rights reserved.

Quick Poll

Which risk do you perceive as being the most significant for EM investors today?

Previous polls ››

October 2016 Magazine
AsianInvestor Magazine