How 2017’s most proficient asset owners performed

AsianInvestor reveals the reasons behind the winners of our Governance, Innovation, Investment Capabilities, ESG and Individual Contribution awards.
How 2017’s most proficient asset owners performed

AsianInvestor’s annual institutional excellence awards are designed to identify, recognise and celebrate the asset owners of the region that are either best-in-class in their institutional areas or geographies, or are fast improving and worthy of recognition for their efforts. 

Increasingly, institutional investors across the region are operating at a high level in many areas of their operations. While this has made choosing this year’s winners more difficult, it is also a pleasing sign of the rising level of investing sophistication in the region.

This year's regional asset owners were particularly impressive therefore. They combined continued improvement to their processes, internal resources and the astuteness with which they interweave increasingly sophisticated investment portfolios amid tougher investing climes and high asset valuations. They are all worthy winners.

Below, AsianInvestor explains why we chose four institutional investors for our institutional proficiency categories, and named one individual for their contribution to institutional investment.    

Bank Indonesia

It is perhaps surprising to see a central bank receive this award—largely because the investment management of these institutions tends to be very low profile and behind the scenes, so their governance approach does not tend to receive the credit it deserves.

Bank Indonesia has strongly embraced international best practice and put in place a governance and strategic asset allocation framework that might be expected of a larger and more sophisticated asset owner.

The central bank has, over the past year, put more focus on using environmental, social and governance (ESG) factors, said industry sources familiar with its operations. Bank Indonesia also clearly recognises that, more than ever, risk management is crucial today, and it is moving to diversify its portfolio further beyond sovereign bonds.

While AsianInvestor cannot publicise information about many of the bank’s changes, it has gained the praise of specialists and is understood to have gained the recognition of the World Bank’s peer review for its approach. It is a worthy winner.

New Zealand Super

Typically, Asian institutional investors are at a relatively early stage when it comes to environmental considerations and their impact on investing plans. Many worry pulling away from polluting but profitable businesses will hurt their level of performance.

New Zealand Super stands as an exception. The sovereign wealth fund decided, in late 2016, to dramatically cut its exposure to companies with high exposure to carbon emissions and raise investments into lower risk companies instead by adopting an exclusionary investment strategy. 

And in August it revealed that its global passive equity portfolio, which comprises 40% of the NZ$35 billion fund, was now low carbon. It had shifted NZ$950 million of assets out of 300 high-carbon-emitting companies. 

The decision means NZ Super’s carbon footprint fell 19.6% as of June 30, 2017. It is very much in line with the belief of the fund, and in particular chief executive Adrian Orr, that climate change risks will having a major and under-appreciated impact on investing in the future. 

Both he and chief investment officer Matt Whineray believe the markets are greatly undervaluing climate change risk over the long term, which is how NZ Super makes its investments.

To help instil its approach to carbon exposure reduction NZ Super set up its own methodology, using that of MSCI as a basis, to manage and measure this new policy, while its trustees, the Guardians of NZ Superannuation, have begun incorporating climate change considerations into their investment analyses and decisions. 

It isn’t done with this approach either. As Orr has told AsianInvestor, NZ Super wants to overlay carbon considerations over its active investment portfolio too. 

Employees' Provident Fund

For Malaysia’s leading pension fund, diversifying and improving its investment approach is a necessity, given that its assets under management grow by 10% a year on average. 

So it has focused upon improving its internal investment capabilities to better put its mounting capital to work. 

The fund has created a management investment committee to better support its investment panel. The committee assists in the management investments, and recommends new investment-related proposals to the panel, to give it new and compelling investment ideas. 

That is part of a broader effort by EPF: to increase its internal investing capabilities. In 2015 the pension fund created a talent pipeline to groom potential successors for retiring executives, to ensure continuity of its approach. And the fund regularly sends its investment employees on scholarships and encourages them to gain accreditations such as CFAs and ACCAs.  

Meanwhile, it has raised the size of its investment division to more than 50 professionals. Some have been able to go on secondments with partners, to better understand the pointy end of investing. That has helped build its institutional knowledge, and today it has increased its foreign market investments from 23% in 2013 to 29% in June 2017. More impressively, 60% of its foreign-listed equity using in-house managers. 

In fairness, much of this is passive in nature. The 40% still run by external fund managers is focused upon generating alpha. They’ve done a decent job; EPF estimates its outsourced funds have enhanced its overall returns by 3% over thee years. 

It is now making an annual return of 6% to 7% a year on its whole portfolio, around two percentage points higher than a few years ago. 

As part of this self-improvement, EPF has become a willing direct investor. It now owns over 100 buildings, while its internal team has overseen some complex private equity and co-investing such as a co-investment alongside GAW Capital to develop logistics assets in China. These efforts have led its private equity, infrastructure and real estate investments to inch upwards from 3.7% in 2013 to 4% in June 2017, even as its overall AUM rises. 

More is likely, with EPF now seeking out opportunities in areas such as private debt. 

Government Pension Investment Fund

Japan’s largest pension fund already stood out as a leading advocate of improving governance and investing habits. But over the past year it has put its focus on beating the drum for ESG. 

The pension fund announced on July 3 that it had chosen three ESG-linked indexes, to which it said it would assign ¥1 trillion ($9 billion) in passive equity mandates. It followed this up on November 8 with invitations to fund managers to propose ESG indexes to help manage its offshore equity passive strategies. 

The two developments underpin how dedicated GPIF is to installing ESG concepts in the country. The pension fund has done so in large part because it believes the concepts help manage business risk. But more prosaically, it is aware these concepts are gaining traction globally and Japanese companies have not fared well under ESG standards. 

This is in large part because many of them have not traditionally been active suppliers of information, while others had not really taken social or environmental issues very seriously. 

GPIF is intent on changing this. It has told all asset managers it works with to become signatories of the United Nations’ Principles for Responsible Investment, while it asked all Japanese asset managers it works with to set up third party committees to oversee operations in order to manage any potential conflicts of interest. 

In addition, GPIF also asked all ESG rating providers to fully explain their methodologies to Japanese companies, so they can better comply. 

In this way the asset owner intends to imbue Japan’s investment industry with concepts of ESG. 

That tallies well with Tokyo’s objectives; it is equally intent on seeing better corporate governance and more women in senior positions in the workforce; something the MSCI Japan Empowering Women index (one of the three that GPIF agreed to use in the summer) targets.

Next up, GPIF is looking at ways to expand ESG into areas such as fixed income and active equity and alternatives; it has partnered with the World Bank to research how best to do so and aims to have the results by March 2018. 

Adrian Orr, chief executive officer, New Zealand Super

Controversy arose in 2016 when it emerged Adrian Orr was New Zealand’s best-paid public servant. Yet it’s hard to argue he wasn’t worth the money. 

For the fiscal year ending on June 30, the sovereign wealth fund returned a whopping 20.71%, raising its fund size by NZ$5.27 billion to NZ$35.37 billion. 

That was NZ$1.28 billion more than its reference portfolio benchmark, and way above the 2.7% per annum minimum benchmark rate. It brings the fund’s return since inception in 2003 to 10.17% per annum. That’s good news for the goal of helping New Zealand meet its retirement funding needs (it will start making payments to the Wellington government in 2035 and 2036).  

Orr deserves much of the credit for this. He oversaw NZ Super’s strategic tilting approach, by which it essentially takes advantage of its long term investing horizon to target cheap assets and holds them until their value improves. He also encouraged the fund’s expansion into new asset strategies, such as factor investing in 2016. 

NZ Super’s strong returns come despite Orr shifting its passive portfolio into a low carbon exclusionary strategy (see Innovation award). It’s also a sign that NZ Super’s approach to mix internal management of portfolios such as active New Zealand equities has married well with using external experts for areas such as active credit and private debt. 

Under Orr, the fund has made more direct investments too, including a stake in renewable energy development Longroad Energy Holdings for NZ$25.3 million in 2016. Other investments include Datacome and Metlifecare life insurer.  

Orr had next wanted to overlay the fund’s carbon reduction onto NZ Super’s actively managed investments, but that may fall to others. In December the CEO revealed he would be leaving in March 2018 to become the governor of the Reserve Bank of New Zealand. It certainly sees his value.

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