An overwhelming majority of institutional investors in Asia ex-Japan see market asset bubbles, geopolitical instability and rising inflation as being some of their top concerns for the next 12 months in a new survey.

Market asset bubbles were pinpointed by 87% of the Asian institutional investors surveyed as a top concern, while 64% of respondents in the region said global geopolitical instability was a concern.

In Asia, rising inflation was a bigger concern than in the US, with 47% of respondents in the region saying so, compared to only 39% of US-based investors.

The findings were published in the Institutional Investor Compass Survey from MFS Investment Management, which surveyed 540 institutional investors across 15 countries that managed pension, endowment, foundation, insurance, or sovereign wealth fund assets of at least $100 million. Respondents were surveyed between February 1 and March 11, 2021.

Most of the respondents (67%) were optimistic about post-pandemic economic recovery with 39% believing their governments coped well during the pandemic. In comparison, 0% of UK respondents and only 7% of US respondents agreed that their government did well.

Jonathan Tiu,
MFS Investment Management

Despite this optimism, only 33% of the investors said they had confidence in achieving their short-term investment objectives, while only 36% were confident about achieving their long-term investment objectives.

“While there has been an overall recovery in spending as pent-up demand is released in the Asia ex-Japan region, the global disruptions across industries, markets and regions stemming from the pandemic have left institutional investors uncertain about the future,” said Jonathan Tiu, chief executive of MFS International Singapore.

“This sentiment against a fluctuating inflationary outlook demonstrates that a renewed focus on long-term, fundamental investing will be key to addressing uncertainty at both the industry and individual security level post pandemic,” he said.

ACTIVE MANAGEMENT

Tiu added that investment returns in the next decade will be markedly lower than they have been historically.

"Consequently, skilled active management and the alpha it can provide will play an important role in helping investors achieve the additional returns needed to meet their retirement goals," he said.

Asset owners in Asia Pacific, such as Australian funds, did take an active approach during the pandemic, which has reaped rewards as several have achieved record returns of around 20%.

For instance, AustralianSuper told AsianInvestor that it employed a range of active strategies such as fundamental, quant and rotation between styles and themes. Sue Brake, chief investment officer at Future Fund, also told AsianInvestor in an earlier interview in June that the sovereign wealth fund has taken on more active management of its assets.

“A more fragile market provides more active opportunities. So even if we didn't believe in it before, we believe in it now, but we've always believed in it, and this has strengthened our conviction that active management will lead returns over the horizon that we care about,” she said.

Investors also showed mixed views about the pandemic’s effects on assets, with 49% anticipating that some industries would not recover and 48% believing that Covid-19 has created investment opportunities.

Tiu told AsianInvestor that respondents were not asked to specify which industries would recover and where opportunities have emerged, but previous MFS research found that the key to surviving an environment like a pandemic is to have that long-term time horizon.

“There were sizable market dislocations when the Covid-19 crisis hit. For long-term investors, these types of dislocations have the potential to create opportunities,” wrote the report titled ‘Remaining Grounded During Market Dislocations’.

“The key is to identify where the market may be too optimistic or pessimistic relative to long-term fundamentals and remain focused on fundamentals instead of technical factors or the hype and noise that are in the daily headlines,” it wrote.

SUSTAINABLE RUSH

The MFS survey also found that the pandemic has gives investors an impetus to consider environmental, social and governance (ESG) factors in their investment decisions.

More than half (60%) of respondents agreed that sustainability will be more important as a result of the pandemic going forward, with particular focus on ESG factors rather than the human impact of the pandemic.

“We continue to see institutions in Asia ex-Japan engaging more intensively with us on sustainability,” Tiu said.

“While the pandemic has exposed significant gaps in the social contract, we’ve begun to see a shift in how institutional investors think about sustainable investing even though the material impact of ESG factors remains a challenge for many as we emerge from the pandemic,” he added.