As pension funds from the United States and Canada seek to boost their Asia exposure, those from Asia are going global.
The global financial crisis has crippled growth for Western countries, forcing their pension funds to seek higher returns in Asia. But for Asia funds, which emerged relatively unscathed from the crisis, the bombed-out markets of the West offer the chance to pick up good assets at attractive valuations.
The dichotomy of strategies and goals was on full view last week at the Pacific Pension Institute’s annual Asian meeting, held in Hong Kong. There, institutions such as the Hong Kong Jockey Club, Korea National Pension Service and Korea Investment Corporation expressing the desire to globalise their allocations, while a number of North American counterparts expressed the desire to become more involved in Asian markets.
For many Asian investors, the global financial crisis has not so much changed their investment goals, but the way they go about making their decisions.
Jacob Tsang, group treasurer at the $8 billion Hong Kong Jockey Club, says its benchmark already has a high exposure to emerging markets, so its target for diversification is developed markets.
But while asset allocation was previously an annual exercise, the club has become more critical about the inputs and frequency. Most importantly, it is asking its board of trustees to engage in strategies once seen as market timing. “We see it as a shorter investment cycle,” Tsang says.
The club is also converting its equity exposure to credit. “We’re moving higher up the capital structure while maintaining a good return,” Tsang says. Last year, the club also began to search for secondary private equity and distressed opportunities. In general, its strategy is more focused on niche fund managers.
At the portfolio level, the club is now willing to pay for options strategies to protect itself from market downturns, despite the often high cost of insurance. The board of trustees has come to accept this after having experienced the limits to diversification in late 2008.
The $280 billion NPS says its basic allocation strategy has now returned to its pre-crisis formulation. It is looking to increase its exposure to global private equity and to add other risk assets (including real estate), but this remains at the margin of its total portfolio, says Lee Kyungjik, head of global equities and fixed income at NPS.
The crisis, says Lee, has been a wake-up call for investors following traditional benchmarks. There is a renewed preference for absolute returns, and on the use of principal protection.
“What's the right benchmark now?” Lee wonders. “We should consider things like risk-factor models,” as opposed to traditional market-cap weighted indices.
Korea Investment Corporation’s Scott Kalb reiterated many of the statements he had made at AsianInvestor’s Annual Investment Summit in May, with his explanation of the $30 billion sovereign wealth fund’s move towards US and European distressed debt, private equity and infrastructure opportunities.
Kalb cites the June announcement that KIC, China Investment Corporation, Temasek and the Abu Dhabi Investment Company teamed up to invest in US-based Chesapeake Energy as a “landmark” deal. It showed the desire among Asian funds for long-term US assets, and their ability to co-invest to make such deals more palatable to Western governments.
These moves are in contrast to the goals of North American public pension funds, whose focus is primarily on capturing growth from emerging markets, Asia in particular.
Theresa Whitmarsh, executive director at the $75 billion Washington State Investment Board, says the fund is ahead of the curve for a US pension scheme, with a rather large 35% allocation to global equities and 26% to private equity. But while the fund is overweight South America relative to the MSCI World equity index, it has only 2% allocated to Asia. Whitmarsh says the goal is to seek local partners to put more money to work, particularly in Asian real estate.
Similarly, Doug Pearce, CEO and CIO at British Columbia Investments Management, says his fund is putting more emphasis on emerging markets and Asia. Although it is also progressive, with 45% of its allocation outside Canada and a long history as a limited partner in Asia PE funds, it understands its lack of expertise when it comes to Asian investments. The fund is looking for more advisers or investment teams on the ground here to use as partners.
Pearce’s concern, however, is the capacity of Asian capital markets to absorb the flows coming from funds such as his and Washington State. “If everyone wants to invest in Asian private equity, can it work?” he wonders.
The other challenge is that the biggest economic growth is in places such as China, India and Southeast Asia, where legal systems, track records and so on are far from ideal. He says it is difficult to judge whether Western LPs will really get the return they need from PE funds to compensate for the risk. He says a big factor in success is often timing when an investor enters a market.
Asian funds are also keen on PE – but not in Asia.
The Jockey Club’s Tsang says the financial crisis showed that, with funds having to mark assets to market, their performance correlates highly with public equities. It currently has about 25% of its private-equity commitments weighted to Asia.
Moreover, the high-octane buy-out model in the US doesn’t usually work in Asia. In Asia, private equity must content itself with minority stakes and corporate-governance challenges. The club would rather look at opportunities in US CMBS, turnaround stories and distress. “You can get the same return without all the hassle,” Tsang notes.