Across Asia, institutional investors have been opening their minds to investing possibilities in niche alternative asset classes, as equity valuations continue to trade at gravity-defying highs, and traditional bond yields remain tight.
The need has taken asset owners of all types into unusual instruments.
Hong Kong-based insurer FWD is one such company. Chief investment officer Paul Carrett told AsianInvestor that he had eyeballed this area for opportunities, although had yet to participate. “Banks are constrained [in Europe] and insurance companies are less so, so can step in and offer some support,” Carrett said.
Taiwan’s Bureau of Labor Funds (BLF), the state pension fund operator, is another name looking at newer alternatives. “The bureau is aggressively watching all kinds of alternative investment opportunities,” Feng-Ching Tsay, director general for the fund, told AsianInvestor in emailed comments.
It began investing into private debt funds in 2016, “due to the low yield of fixed income investments in the public market,” he said. BLF has also placed funds into private open-ended infrastructure funds and indirectly buys into securitisation products too, via exchange-traded funds and mutual funds.
Korea’s Public Officials Benefit Association (Poba) is also receptive to new forms of investment. Chief investment officer (CIO) Jang Dong-hun joined in 2014 and has since bear-hugged diversification to help boost returns. He began with overseas assets and traditional alternatives, but is now investing into more niche areas.
“In July we hired two private debt asset managers as separately managed account managers, and are committing $100 million to one and €100 million ($118 million) to the other,” Jang told AsianInvestor.
Last year, Poba also put $50 million into catastrophe bonds. The debt, which is backed by a multitude of corporate insurance policies that cover companies in the event of natural disasters, is expected to meet Poba’s 5% annual target return. Keith Patton, global head of credit opportunities at BMO Global Asset Management, likes insurance premium-backed instruments such as catastrophe bonds because they do not correlate with broader markets.
“If they [the underlying insurance] pay out, then the yields go up and so do the premiums, and they become a good time to invest,” he said.
Jang and his colleagues are looking at other niche alternatives too in their quest for more stable cash flows. “Our first step is to read articles posted in publications by pension consulting organisations, and where I see ideas that can make sense we study the opportunity,” Jang said.
Poba then typically calls for expert fund managers to pitch for a new mandate in a beauty parade, before awarding the final winners.
Still newer areas
Institutional investors are typically advised to only allocate 15% of their portfolios to alternatives, so newer, more niche alternative investment products might only make up 5% at best. But that still means many hundreds of billions of dollars that could be directed into this space (or $1.84 trillion based on the combined assets of our AI300 constituents alone).
That said, for Adeline Tan, Mercer's head of advisory for Hong Kong, Asian interest in different alternatives may grow more slowly than in other regions, particularly in Hong Kong. “The biting of the bullet has not been as strong here as in other regions, partly because pension schemes in Hong Kong have not had as desperate a search for yield as those in the UK or US as they pay a lump sum on retirement, not a long tail of liabilities.”
Grow it nonetheless will, particularly among the ageing economies of Korea, Japan and China, where pension scheme assets will swell in the coming decades. That’s because keeping pace with the payment needs of rising numbers of retirees is an obsession with CIOs, who will increasingly weigh the merits of doing so by investing in a wider range of assets just as BLF and Poba already are.
So expect yet more niche alternatives to evolve—including, say, cryptocurrencies or peer-to-peer lending. But it could take many years, partly because both areas are new and questions linger about the robustness of the laws and technology supporting them.
For now, some clients might access them via venture capital funds as they lack large enough allocations to warrant much time today, Mercer’s Tan said. But investors have time to wait as they will keep on getting more money and will need to put it somewhere.
It seems inevitable that some of that will find its way into less well-trodden parts of global finance.
This is the second part in a series of stories looking at niche alternatives, from AsianInvestor's August/September edition. Part one can be found here. Look out for a story focusing on private debt next.