Fund houses in Asia should prepare for a fresh wave of institutional mandates over the next two years as the region’s largest asset owners move to diversify overseas and outsource more.
This was one key theme to emerge from AsianInvestor’s annual survey of the largest 300 institutional investors across Asia Pacific, based on our AI300 ranking published in the July magazine and available on our microsite, www.asianinvestor.net/ai300.
In the AI300 survey*, sponsored by Goldman Sachs Asset Management, an overwhelming 73% of Asian institutional investors said they planned to raise their international exposures over the next 12-24 months (see Figure 1). That was a material increase on last year’s AI300 survey, when the figure was 65%.
Alternatives saw a strong vote of confidence from institutions, with 50% of respondents planning to raise allocations to the asset class, up from 48.5% last year. But just 23% aimed to increase in fixed income, down from 28% in 2013.
This underscores the need to diversify amid low-yielding global fixed income markets, although the result could be skewed by a preponderance of insurers among respondents**.
Sheila Patel, chief executive of international at Goldman Sachs Asset Management, said of Asian respondents’ overseas diversification plans: “We have seen more allocations to the US from people either confident in the recovery or thinking that returns in developed markets might be more reliable.
“We have seen this from sovereign wealth-type entities around the region. There is a similarly positive view on Europe, although perhaps not quite so proactive. People are not quite so sure of the recovery there.”
Asked which asset classes they planned to increase exposure to internationally, there was consistency across the board. A healthy 40% of respondents said they would raise allocations to alternatives overseas, down on 42% last year. Meanwhile, 51% said they would raise in global equities (48% last year) and 39% to fixed income (40%).
Within international equities, asked where they anticipated investment opportunities over the next 12 months, a strong 30% said emerging markets.
Patel noted the Indian equity story had started to resonate with a number of different clients, who wanted to know whether the market rally was a real investment story for the next few years or if it was driven sentiment over Narendra Modi’s election victory.
“Questions [on India] that we are hearing are: ‘Did we miss the rally?’ and ‘Are reforms sustainable’,” Patel said.
Interestingly, US equities scored a healthy 23% of votes, which combined with 15% for Europe and 6% for Japan gave developed markets an overall tally of 44%.
Karl Wianecki, chief operating officer for GSAM in the region, said: “Given how heavily US equities have been bought and where they were when we did this survey [in August], the fact that Asian investors still see room to grow in the US is a pretty powerful statement.”
Patel added: “The debate is still open as to whether investors move ahead by continuing allocations to developed markets or find their feet in emerging markets.”
A strong 48% of respondents said they would increase their international equity allocation by 0-10%, while 10% said they would increase it by more than 10%.
Encouragingly for international fund houses, 32% of Asian institutions said they planned to outsource more over the next 12 months, an increase from 28% in last year’s survey (see Figure 3).
Meanwhile 16% said they would in-source more, down from 17.5% in 2013, and 47% said they would retain the same balance.
* Our survey received 100 responses from 93 institutions across 13 countries. This included central banks, sovereign wealth funds, pension funds, insurance firms, commercial banks, official institutions and an endowment.
** Insurance firms were most well represented (38), followed by commercial banks (27) and pension funds (20). It means more than half of our responses came from liability-driven investors.