AsianInvestor's seventh annual Institutional Excellence Awards encompassed one of the most challenging periods for investment in living memory.
Standout asset owners during this period have had to be nimble and responsive as conditions sharply deteriorated in late February and March, only to offer investment opportunities in fits and starts from April even as the global economic environment continued to struggle and a US presidential election reached its crescendo.
When choosing the winners of these awards, AsianInvestor and our select panel of expert industry judges took into account the ability of the region's institutional investors to adapt themselves to these unique challenges, in addition to their ability to maintain superior levels of strategic investment planning, maintaining and improving internal resources and personnel and preparing for the obstacles of the future. The winners were the institutions that could best demonstrate how they met these needs.
For our next set of proficiency awards, we explain how China Pacific Insurance Company's ongoing efforts to raise its data and technology game have given it some powerful tools for its investment capabilities, and we discuss how Australia's Future Fund has been an exemplar of the ability to divest alternative assets in a timely fashion, as well as adding to them.
DATA AND TECHNOLOGY
China Pacific Insurance Company (China)
China is typically seen as being at the forefront of technological developments in software and programming, along with the US. And China Pacific Insurance has become increasingly keen to ensure it stays abreast of these developments, particularly when facing strong competition on the tech front from rivals such as Ping An Insurance (see award for Greater China).
The investor has implemented an array of developments to ensure its investing procedures are cutting edge, including designing and building what it considers to be the first domestic frontier investment system.
Essentially, the system uses advanced system architecture and big data technology to manage investment data in a centralised point. CPIC complements this information with external information, public opinion and analysis data, to form a digital lake, or wide pool of information. The purpose is to improve the accuracy and accessibility of the data, to help the company better analyse market and economic trends and quantitative performance.
CPIC then uses this data lake to build out measure asset valuations, potential performance, risk management and other factors – using existing and hypothetical scenarios. That helps it well understand how its portfolio is performing and how it might perform in other situations, or with other asset allocations.
The insurer has also allied this with cloud-based technology and artificial intelligence, to make the system easily accessible and also to automate much of the necessary but tedious filing and categorisation work required to make the system work.
The efforts it has gone to has allowed CPIC to support its investment team with a big data solution that allows them to analyse its portfolio through multiple lenses and dimensions. The team can better calculate likely investment returns, the available liquidity in the portfolio, assess trading performance, and other factors.
Last, CPIC has also gone about creating its own credit risk monitoring system, as it seeks to improve its internal accuracy and the timeliness of credit risk management. The insurer has introducing technological tools such as data crawlers and artificial intelligence algorithms to better oversee counterparty and default risks, recognise potential financial fraud and conduct risk analysis.
That helps reduce the risk CPIC’s fixed income-focused portfolio faces, particularly as China’s bond market expands – along with its level of defaults.
ALTERNATIVE ASSETS INVESTING
Future Fund (Australia)
The sign of a mature asset owner is not that it is always seeking to expand an asset class. Sometimes it is when it decides it is time to cash in strongly performing assets or reduce allocations that appear to be getting concerningly risky. Over the past year and more, Future Fund has been an example of the latter.
The A$161.11 billion ($118 billion) sovereign wealth fund says that as part of its responsibilities of investing for the long term, it is extremely conscious of avoiding downside risk – and ensuring that the investments it holds are not inferior to those available outside its portfolio. That also means. Experts and observers praise Future Fund for its sophisticated approach to alternative assets investing, and its willingness to sell assets as they mature rather than hold onto them.
Over the course of the past couple of years, it has cut positions across debt and alternative assets, over concerns that valuations had peaked. This has included over 30 investments across private equity, infrastructure and property in recent years, deciding that the asset valuations of these positions looked very appealing versus where it had entered, while the likelihood of future returns reducing.
All-told, these shifts led Future Fund to reduce its overall alternative assets position from 50.5% in June 2019 to 41% a year later, a sizeable reduction but one that still leaves it a major player in the alternatives space.
Future Fund has also gone about restructuring its private equity portfolio, cutting its positions with some buyout and international growth managers after they reported several years of good performance. On the direct side, it completed the sale of a 17.2% stake in Gatwick Airport in the UK that it had originally purchased in 2010. It used some of the proceeds from this to invest into new infrastructure areas, including fibre-optic networks and the burgeoning data centre space, both at home and internationally.
Another area that Future Fund has been slimming down is its property portfolio, with a view that the property cycle is nearing its end. That said, it still holds unlisted real estate at home and abroad, including some retail properties that have been adversely affected by Covid-19. Future Fund evidently sees the longer-term value in them, and that selling them today would be very bad timing. Instead, it is actively managing them.
By cutting illiquid asset positions and freeing up some debt investments, Future Fund freed up sizeable amounts of money (it reported a 17% cash position in June), some of which it has used to re-enter specific credit strategies and opportunistic alternatives allocations that focus on mispricing in high quality fixed income.
And it is well positioned to reinvest in alternative asset positions as they arise across the course of 2021. Some of this is likely to be offshore; the fund believes foreign currency exposure will offer it valuable diversification.
The award explanations originally appeared in the Winter 2020 edition of AsianInvestor magazine.