With Asian institutional investors steadily diversifying their portfolios and seeking more specialist strategies, four firms stand out this year in terms of the service quality they have provided, according to research house Greenwich Associates. They are, in alphabetical order, BlackRock, Goldman Sachs, JP Morgan Asset Management and Wellington Management.

More recently, Asian institutions have been seeking new sources of yield by shifting assets to more narrowly focused investment strategies, noted Greenwich. The four managers have provided both high-level advice and the specialised investment products needed to implement these strategies, added the research house.

The US-based firms were named following 139 interviews with the biggest institutional investors in Asia conducted between January and March this year. Goldman Sachs and JP Morgan AM have each also received several awards from AsianInvestor in recent years based on the quality of their service to asset owners.

The biggest portfolio shift between 2009 and this year has been the reduction in domestic fixed income; over that period, the average allocation has fallen to 24% from 40% (see graph, left), according to Greenwich. This capital has been shifted above all into international equities and alternative assets, which have both seen their average allocation more than double.

More recently, this diversification push has moved into a new phase, noted Greenwich. Institutions are moving beyond global equities and into more narrowly focused strategies run by specialist managers viewed as having greater potential to generate yield, such as credit strategies, multi-asset and unconstrained mandates.

Asset owners have increasingly sought external advice and assistance to implement these strategies.

Return expectations

Although Asian institutions remain far more optimistic than their counterparts in Europe and North America, expectations for portfolio-wide returns have been cut to 5% this year from 7% in 2013, according to the report.

Given these reductions, institutions are looking more closely than ever at alternative asset classes such as infrastructure and private equity. Institutions expect the latter to deliver double-digit annual returns over the next five years, said Greenwich.

Most assets invested in alternatives in Asia come from 20–30 sovereign funds and other large institutions that account for the vast bulk of the region’s institutional assets, noted the report. The likes of China Investment Corporation, Korea’s National Pension Service and Singapore’s GIC and Temasek fall into this category. Many of the biggest players have sufficient resources to handle alternative investments such as real estate internally.

These investors will be joined by as many as 30–40 other institutions that are still large in terms of absolute assets, but are too small to take on the task of running alternative asset classes internally, said Greenwich.

This will create a significant opportunity for managers of private equity, infrastructure, commodities, real estate and hedge funds. Hedge funds are particularly promising for managers, noted the report, as most of even the biggest Asian sovereign wealth funds have little desire to run in-house hedge fund strategies.

Asian insurers

Insurance companies represent an enticing growth prospect for managers in both traditional and alternative asset classes. Domestic fixed income still accounts for 47% of assets in Asian insurers’ portfolios, according to Greenwich. As most Asian insurers’ capabilities are limited largely to their home markets, growing numbers of these companies are turning to external managers.

While most insurance assets are still managed internally, external allocations have been growing and now make up some $138 billion. Some insurers in South Korea and Taiwan are now allocating up to a quarter of assets to external managers, noted Greenwich.

Moreover, the recent decision by China Life Insurance to start using external managers represents a huge potential source of assets and likely signals the start of a broader trend among insurers in China and India, says Markus Ohlig, head of Europe and Asia at Greenwich Associates.

* Senior fund professionals were asked to provide detailed information on their investment strategies, quantitative and qualitative evaluations of their managers and qualitative assessments of managers soliciting their business. Countries and regions surveyed include Brunei, China, Hong Kong/Macau, India, Indonesia, Malaysia, the Philippines, Singapore, South Korea, Taiwan and Thailand.