Traditional equity and fixed income asset managers are coming under increasing pressure to compete with fund specialists in the alternatives asset arena, as Asian asset owners seek to outsource approximately one third of their mandates into international real estate, private equity and hedge funds.
The interest of Asian asset owners in offshore and alternative investments was underlined by September research conducted by Macquarie Investment Management. The firm estimated that 30% of outsourced mandates by Asia ex-Japan insurance companies went into alternative investments in 2015, much higher than the average of 8% that took place in 2013 and 2014.
“[Foreign asset managers] are venturing into new and emerging institutions which are smaller in scale but offering more mandates opportunities for their overseas and alternatives exposure,” said Tay Rui Ming, an analyst at research house Cerulli Associates, in Singapore.
The trend for fund managers to try and gain alts mandates from asset owners is particularly pronounced in South Korea.
Manuelita Contreras, associate director at Cerulli, told AsianInvestor that their interest stems in large part from the Ministry of Strategy of Finance, which has been encouraging local pension funds to add overseas and alternatives to diversify and raise average annual returns on investment in today’s low yield environment.
In late July the ministry said it would let state pension funds to increase overseas and alternatives exposure by two to three percentage a year. “They have no choice but to look into overseas market, as there are not enough alternatives opportunities in domestic market,” Contreras added.
In addition, Korea Investment Corporation is also aggressively moving into alternatives. The country’s sovereign wealth fund reportedly intends to allocate 20% of its portfolio into alternatives by 2020, up from a 12.4% exposure at the end of 2015. KIC had assets under management of $91.8 billion at the end of 2015.
Foreign asset managers are particularly approaching mid-tier asset owners like Korea Teachers' Pension fund and National Credit Union Federation to try and gain alts mandates, Tay observed.
Large-scale institutions are also interested in building offshore and alternatives exposures, but they have more capability to do so through internal investment teams, making it harder for foreign managers to win mandates from them, he added.
But while the increasing demand of asset owners into alternatives means traditional fund houses are eager to compete for these mandates, it’s an uphill struggle.
Their alternatives teams are usually relatively small, and typically located within their global investment divisions.
The relatively small resources they allocate to such investments make it difficult for these teams to compete with alternative specialised-managers, which are usually the go-to choices for asset owners seeking to outsource alts mandates.
There are rare cases of wins by traditional fund houses. Korea’s National Pension Service (NPS) handed out two $500 million fund of hedge funds mandates to US-based BlackRock and GCM Grosvenor in July. But this is a relatively rare example.
“The case like BlackRock getting a fund of hedge funds [mandate] from the NPS is quite an exception and surprise to managers in the region,” said Contreras.
While traditional asset managers face a difficult task in convincing regional asset owners to hand them alternative investment mandates, they are likely to keep trying, given the likelihood of more such mandates being handed out next year, said Contreras.
Traditional fund managers might be better off focusing on fixed income mandates, which remain the dominant asset class when it comes to institutional outsourcing in Asia. Ng Sze Yoon, director for Asia Pacific at UK-based consultancy Spence Johnson, said alternatives remain a tactical allocation for many asset owners, and thus mandates size are relative small, she noted.
However, fund managers seeking to gain more such business also need to adapt to the changing demands of Asia asset owners in fixed income, such as offering more flexible and unconstrained fixed income strategies.