Assertive investors demanding more say on mandates
As the in-house expertise of asset owners increases, so too will what they demand of external managers.
That was among the key messages at AsianInvestor’s 14th Asian Investment Summit in Hong Kong on Tuesday as asset owners discussed the challenges facing them in their efforts to build and manage a future-proof portfolio.
Asset owners have been increasingly building up their in-house capabilities in recent years as low yields have created more demand for outperformance. As a result, Rudd said, the relationship between asset owners and asset managers is changing as asset owners become much more involved in terms of their oversight and the conversations they hold with managers on how to optimise portfolios.
“In a low-return world, if you can add an extra 10 basis points here and there, it quickly adds up and have quite an impact on the portfolio,” he said.
Rudd’s comments came after Alan Liu, head of treasury at the Hong Kong Housing Society (HKHS), said it had become increasingly important for asset owners to closely monitor investments and have more direct influence on investments for fiduciary reasons, echoing other asset owners.
In Liu’s view, the days when asset owners could just give a mandate to a manager and settle for monitoring performance could soon be over.
“Nowadays we need to understand what is going on in the portfolio, we need to be up to date on markets, so when things go wrong we can’t just say that the managers did the wrong thing and apologise,” Liu said. “We need to take on that responsibility in-house. As a result, we do need data systems to help us.”
He added that many consultants had gone to become managers themselves , making it harder for HKHS to rely on that body of expertise.
So, instead, the public housing provider has started to build its own capabilities to gather and process data, although limited resources make it a considerable challenge. However, it is necessary as HKHS outsources all non-cash management.
“We have to spend money getting the right systems and people in place. That is a longer-term process but increasingly the trend is to take some of the analytical capabilities in-house, and then use consultants sparingly,” Liu said.
WORK WITH BESPOKE INDEXES
For Prudential Hong Kong, the design of the portfolios that the insurer’s managers run has already become more precise.
“In the old days, you would tend to buy a strategy with managers and then pick and choose,” Rudd said. “Now, we increasingly work with index providers ourselves to create bespoke indexes, which allows us to express the views that we have, for instance, from an [Environmental, Social and Governance]-overlay perspective.”
Prudential Hong Kong licenses internal indices and then works with managers to work against these indices.
“To be brutally honest: If you can go out and spend $60.000 on a $2 billion portfolio, but we get a bespoke index designed for us, it builds into the fact that we have sensitivities and certain factors in other parts of our portfolio, we are much more rate sensitive, we have particular ESG constraints that we want to make sure to build into our portfolio,” Rudd said.
“We get what we want, rather than ending up with what MSCI believes is the right methodology, and then the fund manager adds maybe 100 basis points," he said. "It will be a big area for us moving forward.”
Tae Park, deputy chief investment officer at Korea Investment Corporation (KIC), explained that the sovereign wealth fund outsources around 25% of its $140 billion assets under management.
Although KIC expanded its investment capabilities further earlier this year, the need for external managers will still be present going forward, as the sovereign wealth fund continues to cover global markets for equities and bonds via indices, involving a wide array of currencies.
“With limited resources we cannot cover all the markets. As a result, we try to focus on more generic large-market segments in-house, while the other region- or strategy-specific sectors will be outsourced so that the external managers’ specific strategies complement our in-house management team,” Park said.