As sovereign wealth funds and state pension funds in Asia — as elsewhere — increasingly turn to alternative investments in search of higher returns, hitting performance targets will be a challenge, according to a new industry survey.
Allocations to alternatives among sovereigns increased globally from an average of 10% in 2013 to about 20% in 2018, Invesco’s latest annual global sovereign asset management study published on Monday shows. With total assets under management (AUM) among sovereign wealth funds and state pension funds growing from $3.2 trillion in 2013 to $9.6 trillion in 2018, that represents an increase of $1.6 trillion into alternatives from sovereigns in that time period.
And Asian sovereigns have followed a similar trend, Terry Pan (pictured), chief executive for greater China, Southeast Asia and Korea for Invesco, told AsianInvestor.
“There is still that appetite to either continue their allocation or increase the allocation globally, and the trend in Asia is fairly consistent with what we’re seeing globally,” he said.
But that's making for an increasingly crowded field as more institutional investors make a bee-line for alternatives, extending the time it takes to identify and make appropriate investments that can meet the required returns.
The Invesco study surveyed 62 sovereign wealth funds and state pension funds accounting for $9.6 trillion in AUM, including 18 from Asia. Among the sub-trends underlined by the report is the region's growing penchant for infrastructure and real estate.
Infrastructure is particularly appealing, with about 64% of sovereigns surveyed in the Asia-Pacific region expressing an interest in the asset class. This was the highest figure among the regional classifications in the report.
About 60% of Asian sovereigns have increased allocations to infrastructure over the past three years, the second-highest figure after North America and Europe, which were lumped together under the 'West' label in this section of the report.
“There is definitely a regional preference to this number. Obviously we all know the Belt and Road policy from China and there are a lot of infrastructure-related activities going on. The regional institutional investors are very well versed [in this area],” said Pan.
The presence of the Asia Infrastructure Investment Bank (AIIB) is another key driver of interest in the region; the infrastructure programmes associated with both the AIIB and the Belt and Road Initiative have many Asian sovereigns not wanting to miss out on the potential investment opportunities.
“Whether it’s from a financing standpoint, or a co-investment standpoint, or how does it benefit the local economy standpoint, there is that preference that they do not want to be outside of this,” he said.
That chimes with AsianInvestor’s recent Asian infrastructure poll, which showed investors are generally positive about infrastructure. Japan’s Government Pension Investment Fund (GPIF), for example, issued its first infrastructure mandate in January.
Generally, Asian sovereigns are expecting annual returns in the low-to-mid teens at a minimum, Pan said.
“There are a lot of caveats to that — the type of project, the geographic location of that project, who is involved in that project — and you can go anywhere from the low teens to mid-20% range,” he said.
Meeting those expected returns is increasingly a challenge for Asian sovereigns, however, especially with the growing numbers of investors now crowding into the space.
“If you have more money chasing those projects," said Pan, "it’s going to be harder to find things that actually deliver that return."
Asian sovereigns are also moving more into real estate investments, the survey shows, with about 53% of institutions in the region increasing allocations to the asset class in the past three years — the biggest proportion among the report's regional groupings.
One key driver of interest is the income generation that real estate investments can offer, and that should maintain at least some growth in the asset class even if prices increase.
“If things get expensive, my sense is that the real estate portfolio will not increase as quickly, but I would be a bit surprised to see a drop in real estate portfolios,” Pan said.
Asian sovereigns are well-versed in real estate investment, especially those in Singapore and China, and their portfolios are global in composition.
“Globally, they will have decent exposure in the US [and] Europe," he said. "And obviously in Europe you will be, over the past 12 to 18 months, looking for more of an opportunistic play, taking advantage of the weakened currency or the more stable political situations in certain markets to find value or opportunities.”
Asian sovereigns are interested in having a decent portfolio of regional real estate investments as well, Pan said.
For example, Malaysia’s Employees Provident Fund has indicated that it is interested in having more exposure to North Asia, primarily through real estate, while the Government Service Insurance System in the Philippines issued an $800 million global multi-asset strategy request for proposals in November that included real estate.
Returns expectations in real estate are not dissimilar from expectations in infrastructure investments, though there are differences between core portfolio investments and opportunistic growth investments.
In the lower-risk, core portfolio real estate segment, expected returns are in the low teens, Pan said, while for opportunistic investments, return expectations are probably in the mid-to-high teens.
Real estate investors also face the same issue as investors looking into other alternative investments: an increasing amount of money chasing the same assets, which can lengthen the time needed to identify an asset and deploy capital.
“Whether that’s private equity, real estate, infrastructure, private debt, whatever it may be, it takes multiple years to deploy,” Pan said.
While the average time to deploy capital in real estate was two years in 2015 and 2016, that figure increased to 2.6 years in 2017, according to the report.