Institutional investors in Asia have been selling equities and buying alternative credit assets since June, and are displaying a particular interest in private debt and Asian high yield funds, according to consultants and fund managers.

Nick Kelly, senior investment consultant at Willis Towers Watson in Sydney, told AsianInvestor some of the region’s largest asset owners are shifting their allocations from equities to private debt, high yield bonds, leveraged loans and securitised credit.

“We could easily have a big drop in equities again; alternative credit is a better place to be, you can generate a similar sort of return [to equities] with less risk,” he said, adding that large investors in the region had typically re-allocated about two percentage points of their portfolios from equities to these other asset classes.

Kelly said real estate, infrastructure credit and distressed credit had proven to be particularly popular. Asset owners have been targeting returns of between 5% and 7% for the latter asset class, although precise expectations depended on the sector.

“[At the start of 2020] there was nothing to do in distressed credit now there are significant opportunities,” Kelly said, pointing to US and Europe.

Fifty-six percent of Asian investors surveyed by Bfinance in July said their private credit allocations would be higher in January 2021 than they had been in January 2020, making it a more popular asset class than any other except private equity. In addition, 35% of respondents said they had invested in distressed opportunities explicitly seeking to benefit from the pandemic fallout.  

PRIVATE LENDING SURGE

Jingjing Bai, a Hong Kong-based adviser at Bfinance, said that pension funds and insurance companies in Asia, particularly those Japan and Greater China, have increased allocations to private debt and direct lending funds investing in the US and Europe since March, selling mainstream equities and bond investments to do so.

Jingjing Bai, Bfinance

“Returns in private debt are holding up, relatively speaking,” she told AsianInvestor, adding that because these investments do not mark to market volatility has been lower, too. She declined to estimate large these flows have been.

More conservative investors, particularly those in Japan, preferred direct lending because of current low prices and the greater visibility of individual companies, meaning investors can better understand the risk, she said.

“They prefer direct lending funds due to the higher level of transparence of underwriting and valuations [than other private debt funds],” said Bai. “You can do company-by-company underwriting.”

Japanese investors also currently enjoy relatively low currency hedging costs for US investments too, especially when compared to 2019 levels, she noted. In addition, investors into US leverage funds can often target low double-digit annual returns or receive high single digit rewards for unlevered investments.

Bai said that allocations by Asian asset owners have also increased investments in infrastructure, a sector that had also benefited from investors seeking to reposition portfolios after Covid.

INFRASTRUCTURE DIMENSION

Andries Hoekema,
HSBC GAM

Andries Hoekema, London-based global head of insurance segment at HSBC Global Asset Management added that Asian insurers in particular been keen to invest in infrastructure debt and private debt strategies since the start of Covid crisis. HSBC GAM planned to launch several funds in this space within the coming months and was in addition working on mandates with Asian insurers, but Hoekema declined to give details.

In August HSBCGAM announced a joint venture with Pollination Group, a specialist climate change manager, which aims to raise $1 billion in a natural capital fund from sovereign wealth funds, pension funds and insurers, by the middle of next year.

Many of the investments will have an infrastructure dimension. They include sustainable forestry, regenerative and sustainable agriculture, water supply, nature-based bio-fuels and projects that generate returns by reducing greenhouse gas emissions.

In addition, interest in high yield bond investing in Asia has also seen an uptick. Hoekema said Asian insurers had conducted more investments since July, although he declined to give details on the size of flows or individual mandates.

HSBC GAM estimates Asian high yield will return 7.4% over 10 years, buoyed by the domination of the sector by China, Hong Kong, Korea, Taiwan and Singapore – all countries the fund manager believes are relatively resilient to the effects of Covid-19 and well positioned to benefit from an economic recovery.