Asset owners to reverse outsourcing decline
Asian institutional investors’ use of fund managers has been declining in recent years, but that trend is likely to reverse over the next three years as investors move into more specialised asset classes, finds Greenwich Associates.
On average, the institutions surveyed by the US research house are using 12.9 external managers this year, down from 13.5 in 2013, 15.5 in 2012 and 15.8 in 2011. But they plan to use an average of 15.3 external managers in three years’ time.
“The larger institutions, the GICs and CICs, have been developing their internal capabilities, which is a multi-year trend,” said Abhi Shroff, Asia-Pacific managing director at Greenwich, referring to the Singaporean and Chinese sovereign wealth funds, respectively.
“They also began consolidating managers following the financial crisis and choosing to do more with the managers they deem to be best in class.”
The increase in the use of external managers will be driven by smaller institutions, such as endowments and pensions, starting to outsource, and larger investors expanding their use of external managers, said Singapore-based Shroff.
However, increasing use of managers may not result in greater outsourcing as mandates may decrease in size.
A big theme has been the outsourcing of global fixed income, though that has slowed over the past 12 to 18 months because of poorly performing markets, he added.
Sixty-three percent of institutions surveyed plan to continue using an external manager for international fixed income, while 13% intend to build up internal capabilities for the asset class.
In addition to outsourcing global strategies, the bigger institutions are hiring for more specialised international strategies. “Building a team in Singapore to do US high-yield doesn’t make sense,” said Shroff. "Even the top-tier institutions will have to use more external managers."
Managers seem to be anticipating the potential increase in demand. In a separate, yet-to-be-released survey of 22 of the biggest fund houses in Asia, respondents said they had expanded their distribution teams by five people on average from 2012 to 2014.
“That’s a big increase … compared to the limited increase in outsourced assets. Managers are preparing for continued growth in the markets,” said Shroff.
They may want to look at portfolio advice and solution-based strategies as some two-thirds of the institutions surveyed said they would like to see advice being extended beyond specific mandates. That figure was less than 20% five years ago, said Shroff.
Whereas institutions in Europe and the US tend to focus on liability-driven investing, many big investors in Asia don’t have large liabilities, or if they do, their assets are expanding faster than the liabilities.
As a result, they often seek a specific risk-return objective or specify assets they wish to access or avoid, noted Shroff. This untapped service demand will probably become more apparent as institutions further outsource investment functions.
Turning to allocations, the biggest year-on-year change was in international equities, with Asia ex-Japan investors increasing their allocation to 21% this year from 13% in 2013. Meanwhile, allocations to domestic fixed income fell to 18% from 23%. Alternatives and domestic equities were flat, at 14% and 8%, respectively.
* The firm surveyed 114 institutions across Asia excluding Japan.