Asset owners across Asia are reassessing their strategic asset allocations in light of the economic and financial risks associated with the Covid-19 pandemic. As part of this, they could double their alternative assets by 2024, finds a new study by financial technology company Broadridge being released today (November 3).

The research, titled ‘Asia Pacific Institutional Client Opportunities 2020’, is intended to offer fund managers information to identify the best opportunities to win business from the region’s institutional investors. It follows from a previous report in 2019.

The latest research predicts that asset owners’ institutional addressable assets – assets that can be outsourced to third-party managers – will enjoy a compound average growth rate (CAGR) of 9% a year through 2024 and that Asian insurers will be at the forefront with 12% annual growth in outsourcing over this period.

According to the report, Asia Pacific institutional addressable assets stood at $11.3 trillion at the end of last year, accounting for 17% of total investable assets. Japan and China accounted for two-thirds of these institutional addressable assets, “as demographic shifts push pensions to expand their investment reach and insurance assets continue to grow”.

The conclusion matches the current priorities of many asset owners. Many Australian superannuation funds, for example, are interested in adding to already substantial illiquid asset positions

Evonne Gan, Broadridge

The rising tide of institutional addressable assets in the region is set to feed a need for more outsourcing, and Broadridge predicts that alternative or private assets will prove an increasingly essential part of this – particularly as an ultra-low interest rate environment prevails across much of the western world. Private equity, private debt, real estate, infrastructure and hedge funds can all offer uncorrelated returns to public markets and potentially superior rates of return too.

“We expect Asia Pacific asset owners to double their overseas (non-domestic) alternatives investments in the next five years, from $343 billion in 2019 to $673 billion by 2024,” said Evonne Gan, associate director for Asia Pacific Insights at Broadridge.

In emailed comments, Gan told AsianInvestor that this anticipated rise in allocations would mark a major increase. According to Broadridge figures, regional asset owners’ share of alternatives investments over addressable assets had only gradually grown from 4% in 2014 to 5% in 2019. That is much lower than exposures in markets such as the US or Europe, where many asset owners place 15% or more of their overall assets into alternatives.

As regional asset owners look to add to their alternative allocations, however, they will face the prospect of valuations spiralling upwards, courtesy of expanding war chests among private equity players in particular, and very cheap lending.

"We expect Asia Pacific asset owners to prefer long-term investments with quality, good prospects, stable cash flows et cetera," she noted.

Asset owners in China look set to be particularly picky over their private equity allocations as valuations in favoured areas soar. “There is a tendency to focus on high growth sectors, such as tech and healthcare, that will benefit from the impact of Covid-19,” said Gan.

China Investment Corporation indicated in its latest annual report that its ambition to expand its assets into alternatives to 50% by 2022 may be delayed, in part due to the difficulty of finding opportunities. 

INSURER EXPANSION

The report identified life insurers as having the fastest-growing addressable assets in Asia Pacific, noting that their assets grew by 17% per annum between 2014 and 2019, versus an industry annual average of 12% over the same period.

Insurers, however, have had to adjust to more trying conditions during 2020 and most likely in the future, with international interest rates having been cut in response to the pandemic and government bond yields generally tightening amid a flight to quality.

Gan said that this is having several effects. One is a reluctance to deal with new fund managers.

“Insurance companies have always valued previous experience managing insurance assets highly when it comes to manager selection,” she noted. “As such, for many asset managers, winning assets from Asia Pacific insurance firms for the first time can be challenging.”

Added to that, Gan noted that deep familiarity with an insurers’ balance sheet needs has become particularly important, given the rising regulatory and accounting changes that many are facing in the region. As a result of this, she predicted that insurers would particularly want to deal with fund houses that understood their professional jargon and needs, including having specialised software, noting that “engagement with insurers should be about partnership and knowledge transfer”.

Similarly, she said the physical travel and interaction limitations of Covid-19 is also placing a more risk-averse mindset onto investors, at least when it comes to choosing the partners to deal with.  

“[It] has posed obstacles to new manager selection, presenting a timely opportunity for existing managers to further strengthen relationships, especially with cash-rich Asia Pacific institutions looking for long-term alpha."

That need to find alpha could prove challenging, given the increasing caution of asset owners’ mindsets and yet a need to hit their return targets. “Many investors [are] stuck between a choice of taking on more risk to meet return targets or lowering their targets,” said the report summary.

“We expect asset owners to be increasingly cautious in their investment decisions while asset managers with superior deal-making capabilities and established track records will likely benefit,” added Gan.

Perhaps unsurprisingly, given its motivation to help fund managers, Broadridge predicts one outcome will sustain outsourcing. It has already risen from 6.3% of total investable assets in 2016 to 7.9% at the end of 2019.

“We expect this trend to sustain as heightened risk sensitivity drives diversification needs,” said Gan.