The Hong Kong Housing Society (HKHS) is embarking on a de-risking drive that will see it cut its long-term equity exposure and prioritising passive investments, according to its treasurer.
Alan Liu, head of treasury of HKHS, told the audience of FundForum Asia on Tuesday (October 15) that the organisation intends to trim the equities portion of its long-term asset allocation from 72% of total assets under management to 65%.
He did not specify exactly what the 7% shift will be invested into, but at the end of it the other 35% of this new-look portfolio will be made up of bonds (25%) and alternatives (10%), respectively. Over half of HKHS’s $4 billion investment portfolio sits in long-term asset allocations.
Liu noted that the rebalancing was part of a larger drive to cut the investment costs and reduce the risk in its portfolio.
“We are de-risking because of the capital requirement of the society in the next few years,” he said, referring to the HKHS’s plan to build more flats for the land-strapped city. The self-funded organisation has been tasked by the Hong Kong government to build 6,600 flats across the Kowloon district in the next seven years.
That process is also leading it to look to invest more into passive vehicles. “There's a chance that we may make an allocation to passive or ETF [exchange-traded fund] strategies,” Liu told the audience.
“It's more of a case of the needs rather than that we really believe in ETF or passive,” he added. “We want to pick the right vehicle for our purposes. As a result, we are taking some allocations out of the risky asset classes and moving them into a pretty simple vehicle, or asset.”
Liu has already begun this process, having replaced one active manager with a quantitative one as it begins shifting its investment strategy. And HKHS isn’t the only one; according to London-based consultancy ETFGI, assets invested in global ETFs and exchange-traded products have reached $5.64 trillion in June. He did not specify exactly how much sits in passive strategies today, or what his goal was.
A key benefit of passive strategies over their active equivalents is the fact they cost less. That’s important for HKHS, which is seeking to save money where it can.
“Because we have to spend a lot of money and build a lot of flats, fiduciary or fiscal controls may become more important,” Liu said.
He noted that budgetary constraints were not the sole reason to start adopting passive strategies, but that the money saved can be put towards building more apartments. That’s a definite consideration for an organisation that does not receive any funding from the government.
HKHS is the second-largest hosing provider for the public sector, just after the Hong Kong Housing Authority. However, it has a relatively limited role when it comes to providing public housing, noted Ryan Ip, head of land and housing research at Our Hong Kong Foundation.
While the Hong Kong Housing Authority intends to build about 70,000 flats over the next four years, HKHS will build 2,900 over the same period, Ip said.
HKHS’s long-term view to its asset allocation means that the increased use of passive investments looks likely to stay for the next few years.
“Our investment committee meets twice a year so it's difficult for us to make short term tactical bets, so whenever we make changes to our asset allocation, we have very long-term views in mind,” Liu said.
He noted that it takes six months for HKHS to add a new external asset manager, even if a certain geography or strategy appears appealing. However, Liu said that trend “may well change” after going through the process.
“In terms of tactical asset allocation, we basically leave that up to our fund managers to do that and hence our preference is to have a broader mandate for these managers so they can help us,” he said.
Liu added that the organisation’s external managers enjoy full discretion to invest its assets against given benchmarks. The organisation also seeks to understand the justification for fund manager underperformance, but noted that he ultimately aims to build long-lasting relationships with fund managers.
“Some of our fund managers have been with us for well over 10 years, some close to 15 years,” he said.
HKHS had four fund managers as of the end of March in 2018, according to its annual report.