After reacting to losses during the global financial crisis by enhancing internal management capabilities and moving assets in-house, Asian institutions have changed tack over the past 18 months.
This was set out in a presentation from Abhi Shroff, Singapore-based consultant at research firm Greenwich Associates, at AsianInvestor's and FinanceAsia's 2nd Debt Investor Forum in Hong Kong last week.
Asia ex-Japan institutional portfolios grew by 20% last year to $7.4 trillion from $5.4 trillion, and the share of assets outsourced to external firms grew to 15% of the total ($1.1 trillion), up from 11% of the total in 2010 ($588 billion), according to Greenwich.
"If we exclude central banks and commercial banks, which manage most assets internally, the share of Asian institutional assets allocated to external managers actually increases to more than 30%," says Shroff.
China accounts for the lion’s share of the Asia ex-Japan asset pool with $3.095 billion, followed by South Korea ($1.09 billion), Taiwan ($772 billion) and India ($639 billion).
Meanwhile, institutions this year increased their equity allocation for the first time since 2008, to 22% of an average portfolio from 13% last year, and have almost doubled their allocation to alternatives to 11% from 6% in the same period. This comes at the expense of their fixed-income allocation.
They expect to continue increasing allocations to equities, international fixed income and alternatives over the next three years, but may cut their exposure to cash and domestic fixed income in that time.
Greenwich also looked at plans for selecting external asset managers. On the fixed-income side, the highest percentage (25%) of Asian institutions expects to hire global fixed-income managers, followed by managers of emerging-market bonds (18%) and managers of Asian and domestic bonds (jointly 13%).
For equities, the highest proportion of respondents (21%) expects to hire managers of Asian equities, following by managers of global equities, then domestic equities then emerging-market equities.
“Global fixed income continues to be the cornerstone in this market,” says Shroff.
Focusing specifically on fixed income, Shroff notes that the outstanding volume of Asian local-currency bonds has risen swiftly between 1996 and 2010, particularly in terms of Chinese issuance.
In that time, Chinese local-currency bonds outstanding have grown from $50 billion (0.2% of the total $25.5 trillion outstanding) to $2.6 trillion (4.2% of the total $62.8 trillion). The East Asia ex-China total accounted for 3.2% of the total last year, up from 1.8% in 1996.
There is clearly still a long way to go before Asian bond markets catch up with those of the main developed economies, says Shroff.
That said, bond issuance is steadily rising in the region – particularly in China, India and South Korea – and this is driving fixed-income trading volume. Indeed, two-thirds of fixed-income trading in Asia is now accounted for by local-currency bonds and derivatives.
Greenwich surveyed 100 institutional investors for the asset-management research and 1,000 financial firms for the trading research.