Asset owners at the front of the chasing peloton in the AI300 face a similar challenge to others in our annual survey: how to sustain growth when rising interest rates mean global stock markets are unlikely to do as well this year as they did last year.
Total assets under management (AUM) in the AI300’s second-top-50 rankings grew by 8.24% in 2017 to $5.2 trillion, AsianInvestor's latest study of the 300-biggest asset owners in the Asia-Pacific region shows.
Taiwanese asset owners, insurers especially, led the way in the 51st-to-100th bracket, expanding their total AUM by 19.73% to $612.2 billion, helped by robust market returns and strong insurance policy sales, Janet Li, wealth business leader at consultancy Mercer, said.
But increased stock market volatility and monetary policy tightening in developed economies will make producing similar growth this year more difficult.
Across the region, insurers in this category grew their AUM by 11.61% to $1.7 trillion.
The biggest risk for these insurance companies is interest rate risk because they have the bulk of their investments in fixed income, Li told AsianInvestor.
Company shares remain a key part of Taiwanese insurer’s investment portfolios as well, and given the higher levels of stock market volatility this year, the investment returns of the previous year will be hard to duplicate, she said.
The MSCI All-Country World Index, a benchmark for stock markets globally, is only 0.42% higher year-to-date having added 21.6% in 2017. Some individual national markets, including many in Asia, are also in the red for 2018.
Stocks also gave superannuation fund AustralianSuper a turbo-boost last year, helping it grow its AUM by 23.8% to $74.6 billion – the fourth-fastest growth rate in the second-top-50 bracket – and significantly outperform other Australian asset owners.
For now, AustralianSuper remains committed to the asset class.
“Because you’ve got reasonably coordinated global economic growth, we still have fairly strong weightings towards equities,” Alistair Barker, head of portfolio construction for the superannuation fund, told AsianInvestor.
However, rising interest rates are a concern for the 91-ranked asset owner. So it has shifted its portfolio away from credit investments, as well as real estate and infrastructure, where it believes there is less upside at this point in the cycle relative to equities.
“We’ve been reducing over the course of the last 12 to 18 months our exposure to real estate, primarily because the fact that the return outlook is relatively modest for real estate in the institutional space,” Barker said.
Pension funds as a whole increased their AUM in this bracket by 8.62% to $869.9 billion.
While AustralianSuper is moving away from real estate and infrastructure, it’s eyeing other alternative asset classes in the search for returns.
We still see plenty of opportunities to invest in areas such as private equity and private credit where the return outlook is fairly modest, but it’s certainly better than what a number of broad markets might offer, Barker said.
Within its balanced fund option, where over 90% of its members are invested, AustralianSuper actually decreased allocations to private equity from 4% to 3% in 2017, its last annual report shows. But right now AustralianSuper is considering increasing those allocations, he said.
Taiwanese insurers are also moving into private markets, Mercer’s Li said, but she doubted it would be a key driving force for asset growth.
“Quite a number of insurance companies have ventured into private market investments, but private markets are still a small portion of the overall portfolio, so no matter how strong it is it’s still hard to make such a big difference,” she said.
Among the other insurers looking to allocate more funds to private markets is MetLife, particularly in the area of private debt and commercial mortgages. Korea’s Public Officials Benefit Association (Poba), the Hong Kong Jockey Club, New Zealand Superannuation Fund, and Australia’s Construction and Building Unions Superannuation fund (Cbus) have also either begun moving into private debt or recently increased their alternatives investments.