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. While this 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 therefore particularly impressive. They combined continued improvement to their processes, internal resources and the astuteness with which they interweave increasingly sophisticated investment portfolios to navigate tougher market environments and high asset valuations. They are all worthy winners.
Japan Post Bank
It’s no secret that Japan Post Bank (JPB) has in just two years seen its holding of Japanese government bonds fall from around half its portfolio (¥106.8 trillion) to one-third (¥68.8 trillion) as of March 2017, thereby breaking the habit of a lifetime.
This huge and conservative institution has shifted more capital into foreign bonds in recent years, while working to build its first alternative asset allocation in private markets and hedge funds, as part of a revamp of its ¥210 trillion portfolio.
JPB’s move stands out for its clarity of purpose, level of transparency and the relative speed and professionalism of its implementation. Under Katsunori Sago, who joined as head of asset management in mid-2015, the bank has gone from zero to nearly $10 billion in alternative assets. It intends to eventually build an alternatives allocation of $60 billion or more over a few years.
In addition, this year JPB started investing into passive credit strategies and plans to start buying stocks directly to build on its passive equity allocation.
It has done this with a capable team. Sago, the former vice chairman of Goldman Sachs Japan, has recruited some 50 individuals, including Tokihiko Shimizu from the country's Government Pension Investment Fund as head of private markets investment; Taiichi Hoshino, another Goldman alumnus, to head global fund investments for credit; Naohide Une (also ex-Goldman) as head of strategic investment for hedge funds; Hideya Sadanaga as head of private equity investment from Nippon Life; and Kazunari Yaguchi as head of real estate investment from the Development Bank of Japan.
External asset managers praise the bank’s achievements and professionalism. “Japan Post Bank like to be closely involved; they screen securities heavily and exclude names when appropriate,” said a senior fund salesman. “They have gotten smarter and more discriminating.”
JPB has also focused on strong investment governance. It aims to incorporate international standards in line with the Institutional Limited Partners Association (ILPA) and the Principles for Responsible Investment.
Employees' Provident Fund
Malaysia’s leading pension fund provider gets plaudits from observers for its desire to keep progressing. While other regional institutional investors run good investing operations, consultants say EPF has actively sought ways to improve its own governance.
This has come in a variety of manners. One part comes to diversity. EPF prides itself on including a diverse range of members on its board and investment panel, which today includes four women on the former and one on the latter; no small statement in an industry dominated by men. The pension fund is also committed to transparency, publishing financial results on a quarterly basis, even though this is not required, and offering fully audited accounts in its annual report.
Internally, it has focused on improving its governance by creating a corporate risk scorecard methodology. This system assesses and details the risk of management actions, senior individuals and divisions.
When it comes to engagement with its members, EPF has also been willing to change. The pension fund is committed to the flourishing sharia, or Islamic finance, space. On January 1, 2017, it became the first retirement savings fund to offer sharia-compliant savings to its members. It has incorporated sharia investing into its portfolios too; these now incorporate 48% of its AUM (as of June 2017), versus 39% four years ago.
Meanwhile it allowed its members to transfer up to 20% of the amount they have made in excess of their basic savings and invest it through appointed fund managers, in an effort to get better returns.
Public Officials Benefit Association
While Poba may not be the largest pension fund in South Korea, it’s proven for several years to be one of the most fast-moving in an often glacially paced industry.
In large part this is down to chief investment officer Jang Dong-hun. He has been keen to experiment with new types of investment mandate, in an effort to work out how best to diversify an asset pile that stands at W10.9 trillion ($9.98 billion) now and is rising by around 10% a year (Korea’s aging population is saving more for retirement, leaving all pension funds with fast-growing assets).
Like many Korean funds, Poba has shifting its investments away from uncertain local equities and instead sought out overseas assets, particularly better yielding fixed income products and alternatives. Its commitment to this is impressive; Jang has overseen a shift that has led Poba to hold 49% of its AUM in alternatives, as of late 2017.
He has diversified when doing so, offering external mandates in a variety of alternative sectors including insurance-linked securities, farmland and timberland, royalties and life settlement.
The pension fund also brought in asset managers for a set of separately managed accounts in real estate, credit and private equity, including co-investments and secondaries. Observers credit Jang with reading extensively on new investing ideas and concepts, asking the investment team to weigh in with more months of study, and then having fund managers pitch possiblities, before making a decision to proceed.
Meanwhile Poba has raised its exposed to fixed income from 1.9% at the end of 2015 to 6.6% at the end of 2016, mostly via investments into private debt and securitisation, but also expanding into mezzanine and distressed debt too.
These investing efforts helped secure decent performance. Poba generated 5% returns in 2015, then 11.1% in 2016, in large part due to its active equity investment. Jang is confident 2017 will mark even better returns. Meanwhile its real asset investments returned 8% in 2015 and 7.5% the following year.
To manage this investing approach the organisation has seconded members of its investment team to private equity firms for training. The fund is committed to improving governance too. When reviewing the country’s stewardship code, introduced in December 2016, Poba had the Korea Corporate Governance Service advise it over exercising its voting rights. It hopes to sign up in 2018.
Bureau of Labor Funds
The main state pension fund in Taiwan has continued building its investment sophistication to keep up with an asset base that has risen from $83 billion in 2014 to $114 billion this year.
Boasting $126 billion in assets, and with an extra $7 billion likely to be added each year for the foreseeable future, BLF’s investment team needs to keep finding ways to invest. And the institution has gained plaudits for its efforts, both under the leadership of former director general Huang Chao-hsi, who retired in January, and his replacement Tsay Feng-Ching.
The pension fund is at the forefront of many asset classes in the region. It employs around 10 external fund managers for its international equity mandates. And it has invested into smart beta products for equity and fixed income since 2011, making it a very early adopter. It added alternative index strategies this year, as well as blending several factors together to make more sophisticated approaches.
Meanwhile BLF began investing into private equity and private debt in 2016, after a long period of assessment. At the same time BLF has taken steps to best react to high valuations and the potential for market corrections. In December 2016 it announced an absolute return debt mandate with defensive characteristics worth several billion dollars, to better handle a rising rate environment. Added to this, BLF has invited bids for $2.8 billion in absolute return equity mandates, also to counter potential future volatility.
Domestically it’s proving a pioneering with environmental, social and governance standards too. It launched a global equity ESG mandate worth over $2 billion, also in December 2016, and it has adopted several socially responsible investing indexes in domestic mandates, in an effort to pioneer ESG among local investors. It’s next believed to be looking at an ESG mandate for its domestic equity portfolio too, which will include smart beta concepts.
BLF is doing its best to act as a role model for good governance too. On August 1, 2016, it signed the Taiwan Stock Exchange’s Stewardship Code for Institutional Investors, making it one of the earliest to do so, after having issued a social responsibility report about its operations the month before.
The hope of BLF and the government is that such efforts help embed ESG and good governance into other investors on the island.
This marks the second story to explain why we chose our Institutional Excellence award winners by market for 2017. Click here to read the explanations for the winners of the first part of this award category winners. Click on the relevant link in the following for lists of the winning asset owners by institutional type, and profiles of our proficiency category award winners.