The lowest-ranking 100 asset owners in our AI300 list of leading Asia-Pacific institutional investors saw their assets under management (AUM) grow by 11.2% last year, comfortably outpacing their bigger peers thanks in large part to soaring global equity markets.

However, increased market volatility and concerns over trade frictions between the US and China have tempered growth expectations for 2018, and some are veering off down the increasingly well-trodden alternatives path in search of alpha. 

Total AUM in the 201-to-300 bracket jumped to $1.35 trillion from $1.21 trillion a year earlier, the AI300 annual survey shows.

That improvement, which compares with an overall AI300-AUM growth rate of 7.6%, was fronted by Korean and Australian asset owners, who made up nearly half of all asset owners in the list's bottom third. While 21 Korean asset owners grew their AUM by 13.6% to $284.9 billion last year, another 26 Australian asset owners saw their AUM increase by 15.0%.

Of these, the biggest Korean asset owner was Korea Teachers Credit Union (KTCU), which grew its AUM by 26.2% last year to $23.9 billion, largely on the back of record high-gains in the Korean stock market, according to its investment manager Kim Hyung-on.

“KTCU allocated more capital to large-cap [company shares] and that’s why [our] in-house equity’s performance was the best,” Kim told AsianInvestor, citing the domestic market peaks scaled last year. 

The Korea Composite Stock Price Index 200 (Kospi 200) grew by 24.7% in 2017, hitting an all-time high of 338.83 on November 3, while the MSCI Korea index posted returns of 47.8% over the same time period, helping the KTCU climb11 places in the AI300 rankings to 201.

The highest-ranked Korean institution outside of the bottom-100 is National Pension Service in 13th place. 

The Korea Teachers Pension Fund (KTPF), ranked 225, also benefited from its domestic equity investments in 2017, growing its AUM by 32.4%, the second-highest AUM growth among all Korean asset owners.

“Domestic equity was the best-performing asset class last year – the time-weighted rate of return is 25.63%,” Park Dae-yang, chief investment officer at KTPF, said.

However, it will be difficult to achieve a similar rate of return in 2018 due to growing volatility in domestic and international markets as the Western monetary stimulus of the post-global financial crisis-era is slowly reversed and as trade tensions grow, both Park and Kim told AsianInvestor.

However, US and Western European markets should continue to recover and grow, which should allow KTCU to generate modest returns, Kim added.  

In light of the increased volatility in public markets both Korean pension funds aim to allocate more portfolio capital to alternative investments.

“Alternative investments such as real estate, infrastructure and [private equity] – these asset classes are able to generate stable income and additional capital gains,” Kim said.

Alternative investments like European and American infrastructure, real estate, private debt, and private equity would help to better diversify KTPF’s portfolio, as well as enhance overall returns, Park added.

SUPER OZ FUNDS

For Australia, twenty-one out of the 26 asset owners from Australia were tax-incentivised, government-stipulated superannuation retirement funds.

The total AUM of super funds increased by 15.2% to $256.1 billion in 2017, led by Wealth Personal Superannuation and Pension Fund, coming in at 202 after growing its AUM by 22.1%.

Hostplus Superannuation Fund, ranked 240, had the highest AUM increase among the super funds in the lowest-100 category at 36.1%.

Mercer Super Trust, number 244 on the AI300, saw its AUM grow by 17.7% in 2017 to $14.2 billion, a result also partly driven by its equity investments, Kylie Willment, Mercer’s chief investment officer for the Pacific region, said.

The Australian super fund’s AUM had further increased to $17.9 billion as of June 2018, according to data provided by Mercer.

“Strong returns came from listed equities, which have been in [the] double digits in [2017 and 2018], with small cap especially strong in 2018,” Willment told AsianInvestor.

Mercer’s global equity returns were 16.8% and 15.4% in 2017 and 2018, respectively, while global small-cap returns were 15.28% and 21.53%.

ALTERNATIVE ARRANGEMENTS

Despite the current volatile economic conditions, the super fund remains generally optimistic.

Business growth has come from a range of areas, which gives us confidence it can be sustained in coming years, Willment said.

In fact, the super fund is reallocating towards alpha-generating sectors over those with market beta exposure this year.

“This includes increasing allocations across unlisted assets, both equity and debt, and absolute-return target sectors, such as unlisted property and infrastructure, private debt, and absolute return bonds,” Willment said.

The shift towards alternatives by Mercer, as well as Korea’s KTCU and KTPF, follows a regional trend among pension funds and other institutional investors.

Allocations to real estate, private equity, and infrastructure by Asian pension funds grew from about 4% in 1997 to around 20% at the end of 2017, a February report by Willis Towers Watson showed.

Australian super fund Cbus, ranked 182 in the AI300, has about 7% of its A$42 billion portfolio invested in private debt. Fellow super AustralianSuper, in 91st place, allocates between 13.9% to 23.5% to alternatives across its high growth, balanced, socially aware, conservative balanced, and stable range of funds, according to its last annual report.

In Korea, the Public Officials Benefit Association (Poba) has more than 50% of its AUM in alternative assets, including an investment of $70 million to $80 million in US-listed real estate investment trusts (Reits), while Government Employees Pension Service (GEPS) is planning to invest in hedge funds this year, having made no allocations to the asset class recent years.

Indira Vergis contributed to this story.