AsianInvestor’s annual institutional excellence awards are designed to identify, recognise and celebrate the asset owners of the region that are either best-in-class in their institutional areas or geographies, or are fast improving and worthy of recognition for their efforts.
Increasingly, institutional investors across the region are operating at a high level in many areas of their operations. While this has made choosing this year’s winners more difficult, it is also a pleasing sign of the rising level of investing sophistication in the region.
This year's regional asset owners were particularly impressive therefore. They combined continued improvement to their processes, internal resources and the astuteness with which they interweave increasingly sophisticated investment portfolios amid tougher investing climes and high asset valuations. They are all worthy winners.
Below, AsianInvestor explains why we named five asset owners as the top in their respective institutional categories.
Future Fund (Australia)
Australia’s sovereign wealth fund (SWF) may be one of the world’s leading investors, but it hasn’t been content to rest easy. Over 2016 and some of this year, the fund conducted an international benchmarking study with Willis Towers Watson to review its governance procedures against 15 global peer organisations.
Future Fund has also combined longstanding senior executives with new investment capabilities. Its chief executive, chief investment officer, chief operating officer and chief financial officer have all been at the organisation for over 10 years. In addition it added over 40 new people to its staff in 2016.
This included a new position, a director for market insights and portfolio implications, who helps the CIO analyse insights in investment portfolios. It also appointed a member of its investment team to focus on investment possibilities and risks in the technology space.
The fund has been a major proponent of diversifying its investments into alternatives. These included it teaming up with other organisations for co-investing opportunities, including partnering the Queensland Investment Corporation, CIC Capital, the Global Infrastructure Partners and the Ontario Municipal Employees Retirement System to acquire a 20% stake in the Port of Melbourne for A$9.7 billion in September 2016.
The Future Fund’s willingness to look ahead has served it well over the years. In the three years to June 30, 2017, it reposted an annualised 9.5% return. That is a particularly impressive result, given both fears the government could start drawing down on its assets from 2020 meant it could not invest over as long a period as some other sovereign wealth funds (the government allayed these fears in August). It was also compelling performance given the Future Fund’s concern about the level of valuation in equities and many bond markets had led it to hold a cash position of 23% of its AUM in 2016.
The Future Fund’s long-term performance is impressive too. Over five years it has returned an annualized 11.6%, while it made 7.9% over 10 years. All reflect a good steady return for a fund that now has A$133 billion ($100.5 billion) in assets under management.
RESERVES MANAGEMENT INSTITUTION
Asian central banks—like asset owners the world over—are being forced to move out of their investment comfort zones to squeeze out higher returns from low-rate markets. This is harder for emerging-market reserve managers than most, given they are arguably the most restricted entities as to what they can do with their capital.
Yet Indonesia’s central bank has been making steady progress on this front in recent years. It has moved to update its strategic asset allocation—building on its entry into corporate bonds in 2013—and investment strategy, and is reportedly looking at how to split its burgeoning FX holdings into three tranches instead of two, to provide it with new opportunities to make higher-risk investments.
And, crucially, the bank has worked hard on strengthening its systems, processes and personnel.
Investment experts pointed to Bank Indonesia as the reserves manager that, more than any other in the region, has stood out for advancing its investment capabilities, governance and strategy over the past year or so.
They also noted the institution’s openness to discussing potential ideas, while underlying its professionalism and caution in doing so.
One veteran Asia-based expert on sovereign institutions told AsianInvestor: “I’ve been wowed by Bank Indonesia’s level of sophistication during both private and public discussions. They have embraced best practice in a significant way.”
Sources also said that a peer review was conducted by the World Bank in 2017, which concluded that the central bank’s governance structure, guidelines, operational framework and strategic asset allocation framework for its reserves management are in line with best practice.
AsianInvestor has received further specific evidence of Bank Indonesia’s activities and progress, but cannot publish details for reasons of confidentiality.
Suffice to say, the institution has demonstrated commitment to implementing international best practice, an ever-growing focus on staff development and a hugely mature approach to governance and risk management. Indeed, the bank also received our governance award this year.
Moreover, last year Bank Indonesia opened the BI Institute, a new training and research centre, as part of its stated goal to become the best and most credible central bank in the region. On this evidence, it is on the right track.
Bureau of Labor Funds
An impressive observation to be made of the operations of the Bureau of Labor Funds is that it is remarkably adroit for such a large and politically important public finance vehicle.
Onlookers and partners say BLF demands high standards when it comes to external mandates, yet it pulls the trigger on new types of investment strategies relatively quickly once its investment team is convinced of the merits. That helps to explain the breadth of its investments (see best Taiwan investor award).
In part this confidence is down to the experience and stability of its investment team. The employees have worked an average of eights years at BLF, while section chiefs have typically been at the institution for 12 years. Many are financial or economic specialists, and the fund encourages them to attend forums and seminars conducted by brokers and asset managers, to supplement their own knowledge.
Overseeing them is an investment strategy committee, staffed by senior managers to oversee and review the performance of BLF’s portfolios.
The pension fund typically employs consultant Willis Towers Watson to advise on its portfolio management, but sometimes hires rival firms to help conduct due diligence on its assumptions. It also invites consultants to meet its investment team over several days, to better understand its operations.
It employs a predictable and transparent process for external mandates too, allowing all investment companies to submit bids, before using a selection panel to rank which candidates combine sufficient quality with competitive costs.
It carries this governance to its own processes. Its website is in Chinese and English, and it discloses 14 major items about the way it invests, including its assets under management, asset allocation and even monthly investment performance of local and foreign mandates. It’s a thorough breakdown, and BLF upgraded the website in August to make it simpler and more user friendly.
Life insurance has been growing at a steady clip across most of Asia. Cathay Life has been a key beneficiary in terms of assets, and it has adde to its investing procedures to match this growth.
It expanded its already extensive investment team of 300 by another 20% during the first nine months of this year. The vast majority have masters degrees, and nearly one third are securities analysts. And despite the new entrants, the average tenure of Cathay Life junior managers is nearly 10 years on average, rising to 20 years among senior executives. Impressively, Cathay Life had only 6% staff turnover in 2016.
Utilising advice from its wholly owned fund house Conning and its Strategic Investment Section that it established in April 2016, Cathay Life has been tinkering with the 80% of its portfolio that sits in bonds, real estate, mortgages and policy loans. It reduced its exposure to callable emerging market bonds and high-yields bonds versus its peers, anticipating volatility over the long term.
On the growth side, the insurer has made splashes into emerging market financiers. This included buying a 40% stake in Indonesia’s Bank Mayapada, while Cathay Life raised its stake in RCBC of the Philippines from 22.71% to 23.35% in 2017, and it bought Bank of Nova Scotia’s Malaysia arm for $255 million alongside sister company Cathay United Bank.
Cathay Life has underpinned its commitment to improving its commitment to corporate governance too. It adopted the United Nations’ Principles for Responsible Investing, despite not being allowed to join (due to the politics of China), and it was the first Taiwanese insurer to comply with the principles for sustainable insurance, publishing its debut compliance report in March 2017. It was also a leading signatory to Taiwan’s stewardship code in July 2016.
Hong Kong Jockey Club
The Jockey Club has been an excellent example of the merits of continuity when it comes to investing. Its investment operations were taken over by the internally promoted Chua Sue-wan, who took over after the investment and treasury veteran Jacob Tsang left at the end of 2016. It has since conducted a thorough internal review of its investment practices and created a new investment office solely to manage and generate value for its investment portfolio.
In addition to conducting a thorough internal review of its investment model (see endowment award for more information), The review has led to some improvements in the club’s governance.
For example, a new investment committee was created to oversee investment activity, which is comprised of members with institutional investing experience. This is designed to act as a sounding board and watchdog on the investment decisions of Chua’s team. In addition it has begun to conduct bi-annual checks on the investment office’s performance.
While the Jockey Club lost the years of experience embodied by Tsang, it still enjoys a deep bench. Chua has been at the organisation for nine years and was a fund manager for SEI for eight years before that. On average, the 11 people on its investment team have 10 years of experience apiece.
The fund is eyeing some additions to its capabilities too, with plans to raise the number of dedicated headcount in the investment office from 16 today to 19.
This marks the third story to explain why we chose our Institutional Excellence award winners for 2017. For descriptions of the winning institutions by geography, please click here and click here. Keep an eye out for our final awards, when we reveal why we chose four institutions and one individual for our proficiency categories.