The look-and-feel of institutional portfolios across Asia Pacific continues to evolve in response to an increasingly dynamic macro and market landscape.
This is a direct knock-on effect of the fiscal and policy responses to the pandemic which, in turn, have focused asset owners on new sources of income.
The goal is to mitigate the challenges of low rates and looming inflation via a three-fold strategy of yield, diversification and inflation protection.
“Asset owners in the region want to generate income despite a market environment where there is uncertainty about changing rates, volatility in the income market and also low yields,” explained Simon England-Brammer, head of EMEA and APAC institutional at Nuveen.
Alternatives are increasingly filling the gap and influencing asset allocations. Recent research by Preqin, for example, shows a strong preference for greater commitment to real estate, real assets and private capital.
This is in line with more optimism generally, including reduced concerns over exit opportunities since 2020 following the pick-up in economic recovery.
Driving alts allocations higher
This trend in investor sentiment is particularly striking in Asia Pacific. Private capital AUM, for example, might reach $6 trillion by 2025, having already expanded almost six-fold over the past decade, according to Preqin data. Over $130 billion was raised in 2020 alone.
Other reports also reinforce the potential for various alternative strategies in asset owner portfolios. Among these is a study released in mid-2021 by Private Credit Fund Intelligence (PCFI) in association with the Alternative Credit Council (ACC) of the Alternative Investment Management Association. This highlighted the commitment by those Limited Partners (LPs) surveyed to allocate further capital in the second half of 2021 (compared with the first half).
Specifically, 40% said they would increase allocations to infrastructure and natural resources, with 37% for private credit and 30% for real estate.
“When we talk to large asset owners, many have allocations to alternatives in the single digits, but they say they want to reach 20% in due course,” added England-Brammer.
Proportion of LPs that plan to increase alternative assets allocations in H2 vs H1 2021
Catering to growing investor comfort
Investment managers with expertise in these markets are witnessing first-hand this surge in interest across multiple types of liquid and illiquid strategies.
“We have seen notable demand for our real assets solutions in the past year, which include real estate, farmland, infrastructure, timberland, agribusiness and commodities,” said England-Brammer.
He added that this is well-placed to deliver for asset owners. “We combine leading real assets expertise and sustainability credentials to apply a credible ESG lens, and to report on this across the real assets portfolio.”
Indeed, according to Nuveen’s Global Institutional Investor Survey from February 2021, over two-thirds of institutional investors are planning to boost allocation to infrastructure, natural resources investments and other alternatives as they seek to reduce climate-related financial risk exposure and align portfolios with the transition to a sustainable low-carbon economy.
As a result, the firm announced an enhanced real asset platform with two new business units, Nuveen Natural Capital and Nuveen Infrastructure, in October 2021 to create a more streamlined proposition as investors seek to increase exposure to private markets. The goal, said England-Brammer, is to deliver investment solutions that monetise natural capital and decarbonise assets as owners set net zero carbon goals.
At the same time, certain areas of real estate also look appealing for investors that want specific exposure in growing sub-sectors of the market.
Broadly, periods of economic growth and moderate inflation bode well for the asset class; an inflationary scenario, for instance, drives up rents, leading to solid property valuations and total returns. The benefits of diversification are a key factor, too, given the impact on different segments of the market from different stages of an economic cycle.
Resilient income streams
To complement greater exposure to alternative assets, robust sources of income are another important objective for asset owner portfolios in Asia Pacific.
“In a changing rate environment, allocations to fixed income for institutional investors – particularly pension funds required to meet their future obligations – are front of mind,” said England-Brammer. “This is an increasingly important entry point for conversations with investors in the region, with diverse fixed income requirements to complement holistic portfolios.”
Among the options to consider are US institutional tax-exempt assets. Municipal bonds are also potentially appealing.
As a predominately high-quality asset class with relatively high yield potential, taxable municipals may help boost portfolio returns and improve overall portfolio efficiency through credit resiliency and portfolio diversification. “While taxable municipals may be an overlooked sector for many institutional investors, their advantages will likely garner greater recognition in the future,” he added.
Ultimately, there are key benefits for investors that pursue income sources, whether more mainstream or alternative in nature: diversification of risk and return by harnessing a full breadth of income capabilities; stewardship as a result of creating better outcomes while generating income; and innovation by leveraging deep sector expertise across public and private markets.
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