Investors in Asia Pacific are increasingly focused on future-proofing their portfolios in the wake of the pandemic. From the drivers of strategic and tactical asset allocation to how they plan to select third-party funds, AsianInvestor’s latest Quarterly Sentiment Indicator shows they are adapting to today’s ‘new normal’.
This will involve a practical and selective approach to managing portfolios. For example, survey respondents – who represent institutions with more than $1.5 trillion in combined assets under management (AUM) – will prioritise portfolio diversification, income and long-term capital growth in 2021.
At the same time, they are open again to greater risk-taking as the most appealing way to try to generate additional risk-adjusted returns over the coming 12 months. And when it comes to outsourcing to external managers, they seem to have accepted the need for virtual due diligence.
These are among the trends from the collective views of senior investment executives at insurance companies, pension funds, central banks, government entities and other asset owners in November and early December,
A MEASURED RESPONSE
Vaccine breakthroughs combined with the rebound in stock markets following the initial impact of the shockwaves of Covid-19 have fuelled a relatively bullish outlook among institutional investor respondents.
For instance, nearly 90% of participants expect to see GDP growth in Asia to be at least 2% in 2021.
They believe the most likely reason to derail this prediction would be a global escalation in geopolitical instability, and seem less concerned about lower-for-longer rates and uncertainty over liquidity hurting their portfolio performance.
Yet the challenging investment environment seems to have had a marked impact on how investors are likely to make asset allocation decisions over the next six months.
The drive for portfolio diversification will have the biggest influence, closely followed by an interest in cash yield or income plus long-term capital growth.
For tactical exposure over the next quarter, asset owners have a clear preference for emerging market equities, suggesting a local bias. This is reflected by the fact that survey respondents expect to reduce their allocations to developed market equities and G3 bonds more than any other assets over the next three months.
Meanwhile, the hunt for diversified returns has sharpened investors’ spotlight on alternative assets. For 2021 overall, private equity will see the largest inflows, according to sentiment, followed by private debt.
A report released in November by financial technology company Broadridge, for example, suggested that asset owners across Asia could double overseas alternative assets from $343 billion in 2019 to $673 billion by 2024.
Highlighting the trends in tactical asset allocation, Benjamin Deng, group chief investment officer of China Pacific Insurance Company, told AsianInvestor in late October that the firm has invested into China government bonds to seek better investment returns and lengthen portfolio duration, but it has also added private equity to its portfolio.
In line with increasing levels of cautious optimism among asset owners, the majority of respondents say taking on more risk appeals to them more than other options for generating additional risk-adjusted returns in 2021.
There is also growing interest in collaboration, judging by the number of individuals who will seek co-investments with other asset owners.
There is also notable acceptance of market realities when outsourcing to external managers. To award new mandates over the coming months, for example, half of all respondents say they will conduct virtual due diligence – rather than take a wait-and-see approach in the hope that travel and face-to-face meetings resume at some point in the near future.
Results are based on the anonymous views of more than 35 individuals from various asset owners across Asia Pacific, including insurance companies, public and corporate pension funds and government entities.
Respondents were from markets such as Hong Kong, Singapore, Australia, South Korea, Thailand, Indonesia and Taiwan.
AsianInvestor selected the target audience based on size of the investable assets of each institution.
Each participant used the same set of multi-choice questions to ensure consistency in the dataset.
This article has had its headline updated, as of January 12, 2021.