Asset owners lose faith in conventional strategies

Asian institutions are looking at new approaches to investing including boosting alternatives holdings to increase returns, but just 4% plan to outsource more in the next year, finds Natixis GAM.
Asset owners lose faith in conventional strategies

Disillusioned with the results of conventional portfolio diversification and construction, most Asian asset owners are seeking new approaches to investing and risk management.

Seven in 10 (68%) of respondents to a survey by Natixis Global Asset Management feel institutional investors need to replace traditional diversification and portfolio construction techniques with new approaches. The proportion was similar to that in the fund house’s global survey (67%).

Two-thirds of Asian respondents say historical data showing that longer holding periods reduce the likelihood of a negative annualised return are no longer valid. A similar proportion (62%) say conventional 60 fixed income/40 equities portfolios are no longer the best way to pursue returns and manage risk (the figure was 65% globally.)

Alternative investments are widely viewed as one potential route. Six in 10 (59%) say it is essential to invest in alternatives in order to outperform the broad market (63% globally). And 69% of respondents believe it’s essential to invest in alternatives – such as hedge funds, private equity or venture capital – to diversify portfolio risk (also 69% globally).

Almost three in 10 (28%) say increasing their allocation to alternative/non-correlated assets is one of their highest priorities over the next 12 months.

That’s perhaps not surprising, given that 83% report being pleased with the performance of their alternative portfolios, with only 17% saying they were disappointed. And 52% expect their alternative strategies to outperform last year’s returns.

Nine in 10 say raising allocations to non-correlated assets is an effective strategy for limiting risk in a portfolio, and the same proportion cite increasing allocations to fixed income as an effective risk management strategy.

Kinji Kato, executive managing director for Asia and Japan CEO at Natixis Asset Management, says: “Institutions are adopting consistent portfolio construction processes, focusing more on risk management, maximising diversification, looking to alternative investments and making smarter use of traditional assets.”

However, despite plans to boost their alternatives exposure, only 4% plan to outsource the management of all or part of their portfolio in the next 12 months.

Turning to global macro issues, contagion resulting from the European debt crisis is the number one fear for Asia’s institutions, with 50% citing it as one of their biggest worries as regards their investment objectives.

Respondents also worry that global regulations may have unintended consequences. The vast majority (86%) say the staggered pace of implementing financial reform around the world is creating more, not less, systemic risk.

Eight in 10 believe mark-to-market regulatory requirements will prevent investors from being able to capitalise on market opportunities. And the same proportion say global financial regulatory reform could result in less, not more, transparency on correlated credit/equity exposures, counterparty risk, etcetera.

The survey of 120 institutional investors across China, Japan, Singapore and Taiwan was conducted in June and July. It polled organisations that manage or oversee corporate pensions, public/government pensions, funds of funds, sovereign wealth funds, insurance reserves/liabilities and/or endowments/foundations.

The median asset level managed by Asia-based respondents was $15.4 billion. The Asia survey is part of a larger global study of 482 institutional investors in 13 countries in Europe and the Middle East, as well as the UK and US.

French firm Natixis Global AM manages assets totalling $711 billion as at June 30.

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