Australia’s Cbus Super Fund and Korea’s Public Officials Benefit Association (Poba) are among a growing number of institutional investors that are underweighting risk assets, despite the likelihood that this will lead to lower investment returns.
"We're slightly underweight risk [assets], not overly underweight risk [assets]... we do have some protection across the portfolio given the liquidity [in the market]," Leanne Taylor, head of macroeconomic and markets research at Cbus Super Fund, said at a webinar hosted by OMFIF* on Wednesday (July 29).
Valuations are higher than investors might normally accept, and Cbus is thinking about the defensiveness of its portfolio. But the market will very likely continue to be supported by ample current liquidity, giving some protection across the portfolio. The fund also uses currency as a tool for the risk protection, Taylor said.
"We have reduced our risky assets to some extent. So we are underweight on risky assets, especially on the equity space," added Jang Dong-Hun, chief investment officer of Poba, at the panel discussion.
The Korean pension fund is having trouble deploying capital in the private market as a long-term asset owner due to the challenging environment caused by Covid-19. It currently has more than 10% of its W13.9 trillion ($11.7 billion) portfolio in cash, Jang said.
Central banks have been trying to insulate financial markets from the economic impact of Covid-19 by unleashing waves of liquidity. Although markets are likely to enjoy some comfort moments, Jang warned that there would still be hiccups. Investors need to be more careful, he said.
Cbus Super Fund has A$55 billion ($39.5 billion) under management and aims to meet the pension needs of workers in the construction, building and airline industries. In its portfolio, 70% is invested in growth assets, of which 50% are listed equities across Australia, emerging markets and international equities. It also invests around 25% of its portfolio in properties and infrastructure.
Poba adopts, according to Jang, a risk-averse investment strategy and had a relatively low, 14% exposure to public equities last year. Despite the illiquidity risk, it had about 55% of its portfolio in alternatives, including hedge funds, private debt, real estate and infrastructure.
Shahril Ridza Ridzuan, managing director of Khazanah Nasional Berhad in Malaysia, also admitted that the fund offloaded some riskier assets earlier this year, and was not able to catch the bottom of the equity market in the first quarter.
From an asset owner point of view, especially for a sovereign wealth fund, there is a need to always adopt a very long-term view, he said. The investment results for this year will not be great due to the volatility and over-exposure to certain difficult sectors, but that'll be fine as long as an investor believes in a 10 to 20-year plan.
Even when the coronavirus was just beginning to spread early this year, many institutional investors had already started to take risk off the table.
GOVT BONDS, EQUITIES
After shifting allocations away from low-yielding government bonds for the past few years, the trend is reversing. Investors are demanding safe assets, the 2020 Global Public Investor report released by OMFIF shows.
The report looks at the performance and practices of 750 central banks, sovereign funds and public pensions funds. These institutions have worldwide investible assets of $39.5 trillion. Overall, institutions in Asia Pacific hold 38.2% ($15.1 trillion) of total assets, the greatest concentration of any region. Its asset allocation survey analysed AUM of $19.5 trillion.
More than a quarter of the 71 institutions who responded to the set question said that they plan to increase their allocation to government bonds, against 13% who said they intend to decrease it. This is the first time since this question was introduced in the OMFIF GPI Survey that investors in net terms plan to increase their allocation to the asset class.
That said, the cautious embrace of risk continues for some institutions. Despite concerns about pandemic-related price corrections, 30% of global public investors plan to increase their allocation to equities, while only 5% plan to reduce it, according to the report.
* OMFIF is an independent forum for central banking, economic policy and public investment. It is also a platform for best practice in worldwide public-private sector exchanges.