Asia’s largest asset owners plan to take on more risk by moving down the credit curve and adding exposure to emerging market debt, but retain little appetite for RMB exposure.
At the same time it seems there is a reluctance for them to use the services of consultants, which may reflect an unwillingness to pay fees combined with an increasing tendency to rely on knowledge transfer and partnership investment.
These were key themes to emerge from AsianInvestor’s annual survey of the largest 300 institutional investors across Asia Pacific, based on our AI300 ranking published in the July magazine and available on our microsite, www.asianinvestor.net/ai300.
In the AI300 survey*, sponsored by Goldman Sachs Asset Management, the consensus of respondents was that nominal 10-year US Treasury rates would be higher in 12 months’ time. Some 56% forecast rates would be 2.5-3%, while 30% tipped 3-3.5%. Only 10% predicted rates would fall below 2.5% (see Figure 1).
That expectation fed into the fact that 30% of respondents selected duration management when asked where they would look for alpha in fixed income strategies over the next year.
But interestingly, 24% chose emerging market debt and 18% pointed to moving down the credit curve – reflecting increased appetite for taking on risk in the low-yield global environment.
Nevertheless, only 11% ticked unconstrained fixed income, which was at odds with what Goldman Sachs AM has been seeing, according to Sheila Patel, chief executive of international at GSAM.
“We have seen more [allocations] towards unconstrained fixed income than emerging market debt, duration or moving down the credit curve,” she told AsianInvestor.
One factor that will have influenced our findings is that of the 100 responses we received from 93 institutions in the region, 38 were from insurance companies and 20 from pension funds – meaning more than half of responses came from liability-driven investors.
Asked how their emerging market debt exposures might change over the next 12 months, 35% said they would increase it under current allocations, and 35% would change blend (moving down the credit curve). Only 23% planned to reduce it (see Figure 2).
Patel agreed this was a phenomenon that GSAM was seeing, reflecting enough comfort with hard and local currency EMD to move into the corporate bond arena. She noted one thing to give institutions pause for thought was still the capacity issue.
However, when asked how they planned to increase RMB exposure over the next 12 months, a material 28% said they had no exposure and 24% had no plans to increase it.
Noticeably there was a wide dispersion of responses, with renminbi-denominated qualified foreign institutional investor (RQFII) funds at 10% followed by A-share exposure (9%). Onshore fixed income also received 9% of votes, perhaps surprising given that it’s not easy for international investors to access (see Figure 3).
“This is one of those questions that will be really interesting to see the results in a year’s time,” observed Karl Wianecki, chief operating officer for GSAM in the region. “The dispersion of answers tells you people are still trying to figure it out.”
In our final survey question we asked institutions whether they used consultants, and what for. The top answers were asset allocation (21%) and manager selection (17%).
But the highest score was reserved for ‘do not use’ at 24%, while 15% also did not respond to this question – which could be read as a ‘do not use’ as well.
* AsianInvestor’s survey received 100 responses from 93 institutions across 13 countries. This included central banks, sovereign wealth funds, pension funds, insurance firms, commercial banks, official institutions and an endowment.
Insurance firms were most well represented (38), followed by commercial banks (27) and pension funds (20). It means more than half of our responses came from liability-driven investors.
The results of our survey are published in full in the October magazine edition of AsianInvestor, which was published this week and is available online.