Singapore's GIC is exploring the use of alternative risk premia strategies, adding to the growing list of Asian asset owners focusing on this area. The sovereign wealth fund is also looking to allocate more to private markets, while conceding that they are becoming increasingly crowded.
“We have started moving into or thinking harder about alternative risk premia in the long-only space, in smart beta and in long/short type of strategies," said Prakash Kannan, head of total portfolio management, economics and investment strategy at GIC.
He was describing how the fund was responding to the current low-yield environment, during a panel discussion at AsianInvestor's Southeast Asia Institutional Forum on Wednesday in Singapore.
“We can basically take more risk, we can add leverage, we can seek new asset classes,” added Kannan. “With GIC, it is a little about emphasising the alpha opportunities.”
The aim of alternative risk premia is to capture equity risk factors such as momentum, value or carry.
GIC joins the likes of Australia's Future Fund and Taiwan's Bureau of Labor Funds in more actively exploring the potential benefits of using such factors. And when large, respected and sophisticated institutions make such moves, other investors tend to sit up and take notice.
Certainly, Jan Sytze Mosselaar, portfolio manager for conservative equities at Robeco, confirmed a rising trend among asset owners of using factor-based strategies.
But he advised caution in doing so, saying the capacity of such investments was limited. In addition, he noted, investors in exchange-traded funds may be exposed to risks of front-running at rebalancing dates and overcrowding effects, due to the full transparency of these products.
Private asset push
Meanwhile, Kannan said GIC would further boost its exposure to private assets because “that is where a lot of high returns are likely to be”. But he conceded that the asset class had become very crowded.
GIC's then chief investment officer (now CEO), Lim Chow Kiat, explained in July in its annual report why the fund believed global investors face much lower returns and that it would raise its allocation to alternative assets to boost yields, as reported.
Meanwhile, Peter Ryan-Kane, head of portfolio advisory for Asia Pacific at consultancy Willis Towers Watson, advised caution amid investors' continuing push into illiquid assets. He was speaking on the same panel as Kannan.
Ryan-Kane cited credit as an area of particular concern. “The amount of money that will try to get out when the liquidity cycle turns will be too large to fit out the door,” he said. This will lead to further falls in prices and more market stress, creating a downward cycle, he added.
The situation is exacerbated by the fact that in Asia around 50% of all corporate bonds come from China, he noted, “so a structural issue there would be a problem".
“If there are big shocks, up or down, in currencies in particular, a lot of institutional investors do not have a strong [enough] investment process to withstand this,” he said.
The issue, argued Ryan-Kane, is partly weaknesses in investment processes that lead to reactive responses to bad events and partly a lack of elements such as scenario planning and stress tests.