Home bias is increasing among Asian institutional investors – but the definition of “home” is broadening to include neighbouring countries, says Peter Ryan-Kane, head of portfolio advisory services in Asia-Pacific at Towers Watson.
Speaking at an AsianInvestor event in Singapore, Ryan-Kane says investors from the region have not been passive in the face of economic and financial turmoil. They are shifting weightings towards their home markets, where they can find better returns in equities and debt.
But in many cases, the local capital market is too small for large institutions’ portfolios. So they are broadening their concept of “home” to include sub-regions (North Asia, Southeast Asia), or Asia ex-Japan, or even Asia-Pacific (including Japan and/or Australia).
Other responses by investors have been to increase their exposure to alternative investments, broadly speaking. When it comes to manager selection, institutions are becoming less herd-like and more focused on choosing external managers that suit their particular needs. They are putting more work into the decision over insourcing and outsourcing.
To sum it up, Ryan-Kane says investors are shifting their activities away from “strategy” and more to “portfolio construction”. If these trends have a common thread, it is pragmatism and professionalism.
There is a way to go. Ryan-Kane gave some anonymous examples of investor RFPs to consultants. The list of desires was so long, so contradictory and so unrealistic that it demonstrates some institutions aren’t serious.
But these are becoming exceptions when they used to be the rule – and that is because these institutions are coming to realise that investing is difficult and won’t get easier. Local bond-market yields have become too low to meet most liabilities and allocating abroad has proven risky. There are no places to hide.
Some of the problems that consultants hear these days include: where to find yield when rich-country central banks are keeping interest rates at zero? This is forcing investors to seek returns in risk assets. Investors have to learn to swim in riskier waters.
Another concern: strategic asset allocation – “set and forget” – isn’t enough. But to deploy tactical asset allocations or dynamic short-term strategies requires investors to compete with hedge funds, private equity and other players, and subjects them to lots of market noise.
Alternative investments provide attractive features, but they are labour-intensive and the work involved has been underestimated; some investors are responding by returning to funds-of-funds or commingled models.
While the focus is more on short-term tilts, the long-term horizon threatens liability-driven investors with inflation. Although inflation remains subdued in the beleaguered rich countries, it has returned to Asian markets.
Finally, Ryan-Kane says investors are increasingly giving up on the idea of capital gains. They are settling for steady income. This is good news for contrarians who believe now is a good time to get into equities.
Those are the problems. Ryan-Kane says investors in Asia have taken a number of steps to mitigate them.
In fixed income, investors are moving away from the Barclays Global Aggregate index to customised indices with caps on weightings or broader country universes, mainly to increase their weightings to emerging markets; they are increasingly accepting corporate bonds (although some this year have begun to exclude emerging-market debt and high-yield bonds because these are considered overpriced); and some are excluding European credit; some are excluding mortgages and covered bonds, which are seen as the expression of a US ponzi scheme in housing finance.
In equities, some investors are returning to broad, global mandates while others are overweighting Asia; a few are experimenting with long-term, unconstrained mandates; and they are increasing home bias but redefining it along regional or sub-regional lines.
Finally, in alternative investments, institutions are more active, but in such a variety of ways that Ryan-Kane can’t identify particular trends. “It’s all over the map,” he says. If there is a commonality, it is that the sector is being taken much more seriously and will become a greater portion of investor allocations.