Investable assets held by public and private institutions in Asia fell by 11% to $4.5 trillion in 2008, according to Boston-based financial services research firm Cerulli Associates. That put an end to steady growth that saw their assets more than double to $5.1 trillion in 2007 from $1.9 trillion in 2003.

The institutional assets outsourced to external investment managers, estimated to be 15% of total investable assets in 2008, are also lower than the previous year, but the estimated drop is less severe than the drop in assets under management in the retail sector.

Asia's largest institutions by asset size are pension funds and government or quasi-government agencies, particularly those in China. Pension contributions, larger foreign reserves, and the emergence of new sovereign wealth funds (SWFs) -- such as the Korea Investment Corporation (KIC) and the China Investment Corporation (CIC) -- helped boost institutional assets in 2007. However, investment losses and reduced net flows resulting from the global financial crisis cause total regional assets to decline in 2008, and they will likely fall further in 2009.

These are some of the findings of Cerulli's Asian institutional asset management report, which is the firm's first comprehensive study of the institutional landscape in the region. The report focuses on market sizing and addressability, product development, manager selection, and market trends in Asia's institutional asset management industry. Cerulli plays particular attention to opportunities for asset managers to access outsourced mandates. Countries covered include Korea, China, Taiwan, Singapore, Hong Kong, India, and the Southeast Asian countries of Malaysia, Thailand, Indonesia, Vietnam, and the Philippines.

This report also includes a discussion of business operations, fees and profitability, consultants, and sales processes.

Despite the smaller pool of institutional assets, Cerulli believes that the budding practice of third-party asset management will not see a major setback. To the contrary, a majority of regional asset managers surveyed by Cerulli expect institutional sales to increase over the next three years. While a number of Asian institutions, in particular the SWFs and pension funds, have suffered unprecedented negative investment returns and have delayed their investment plans, others remain open to market opportunities, given the need to recoup losses and meet long-term return targets.

"Having evolved to become a more vibrant source of mandates benefiting both local and foreign asset managers, the institutional sector is likely to recover more quickly than the retail sector, driven by overseas and alternative investments, and more  transparent investment processes," says Shiv Taneja, a London-based managing director at Cerulli. "In the longer term, Cerulli expects institutional assets to comprise a larger component of managers' businesses in Asia."

Cerulli concludes that while Chinese institutions collectively offer the largest base of investable and outsourced assets in the region, regulatory restrictions and ad hoc outsourcing limit the growth potential to a few key players. On the other hand, the Korean market, although smaller in size, boasts a large number of well-resourced institutions increasingly accustomed to investments and third-party mandates.

Here are some of the country-specific findings on the institutional asset management industry from the report authored by Jamie Poh, Ai Meun Lim, and Ken Yap at Cerulli in Singapore:

Korea. Almost 70% of the total asset management market in Korea in 2007 was derived from institutions, with investable institutional assets in the country estimated to be worth W701 trillion ($554 billion) at end-2007, having grown at a steady compounded annual growth rate (CAGR) of 16% over the previous four years. However, the end-2008 figure is expected to show an 8.2% drop to W640 trillion ($504 billion). Although Cerulli forecasts that the institutional market in Korea will see little or no growth in the near-term, it is expected to pick up enough steam in subsequent years to rival retail asset expansion, due primarily to the steady stream of assets expected to flow into the country's pension funds and insurance companies regardless of recessionary conditions.

China. Investable assets held by Chinese institutions grew at a four-year CAGR of 41.7% from 2003 to 2007, reaching Rmb15 trillion ($2.2 trillion) by end-2007. This is more than four times the size of the country's retail segment, but the bulk of institutional assets remains in passive instruments, deposits, or internally managed portfolios. The strongest growth clearly came in 2007, with more than a doubling of assets. This growth is attributable to not just new inflows and market appreciation, but also to the start of the Enterprise Annuity (EA) scheme and the introduction of China Investment Corporation (CIC) in 2007. These one-off factors suggest that such impressive growth, even under positive market conditions, is unlikely to be repeated in the medium-term. Assets are estimated to be down 7% to Rmb14 trillion ($2 trillion) in 2008

Taiwan. Total investable assets grew at a four-year CAGR of 10.3% over the 2003-2007 period, slower than the regional average, due to poor investment returns. Among the three major institutional investor segments, pension funds had the most volatile growth rates over the abovementioned period: from a high of 30% in 2006 to negative 4% in 2007, due to a drastic decline in the value of Chunghwa Post's investments in financial institutions. While the other two institutional investor segments registered positive growth over the last two years, there has been a notable slow-down, due largely to the shrinking of the Taiwanese central bank's foreign assets. Taiwanese institutions are expected to have paid a heavy price for their ventures into the market in 2008, with investments by both pension funds and insurance companies likely to have resulted in negative returns of as much as 50%. Assets are estimated to be down 11% to NT$17 trillion ($487 billion) in 2008.

Singapore. The jump in investable assets in 2007 is primarily a result of more available information on the Government of Singapore Investment Corporation's (GIC's) asset base compared to previous years, allowing for a more accurate estimation of current holdings. In addition, Temasek Holdings experienced strong asset growth as a result of the expansion of its equity-focused portfolio. There was also a steady increase in the amount of central bank and retirement assets. Singapore's institutional investable assets are expected to fall 20% to S$864 billion ($559 billion) in 2008 as the two key contributors, GIC and Temasek, announced significant losses in their equity investments. Other smaller institutions are likely to incur losses as well, although to a smaller extent, as their equity and foreign exposure is thought to be relatively limited.

Hong Kong. Investable assets in Hong Kong reached HK$1.8 trillion ($230 billion) at the end of 2007, growing by a CAGR of 11% since 2003. This includes only retirement assets from the Occupational Retirement Schemes Ordinance (ORSO) and Mandatory Provident Fund (MPF), and assets of the de facto central bank, the Hong Kong Monetary Authority (HKMA). Data on insurance companies is not available, but they account for about HK$600 billion of Hong Kong insurance investable assets based on Cerulli's conservative estimates, bringing total institutional investable assets comfortably past the HK$2 trillion mark. While institutions in Hong Kong command a relatively small amount of investable assets, they offer third-party managers a high degree of access to these assets. The percentage of addressable assets currently stands at almost 50%, the highest in the region. This is due, in large part, to the open and transparent bidding processes operated by pension schemes and the willingness of the central bank to engage the services of independent asset managers.