Institutional investors around the world have been busy taking risk off the table in recent months, turning increasingly cautious as markets have become more challenging.
With a trade war raging, economic fears mounting, asset valuations stretched and more political tensions bubbling to the surface, asset owners have been moving to de-risk their portfolios this year.
GIven the perceived lateness of the economic cycle, Asian investors – including large funds in the region – have been taking various measures for downside protection, Vanessa Wang, head of North Asia institutional business at fund house Amundi, told AsianInvestor.
Some are increasing their cash holdings, others their exposure to perceived safe-haven or uncorrelated assets such as gold.
Another approach has been to shift money into conservative factor-based strategies, such as minimum-volatility portfolios, Wang said.
And a growing number have been moving to manage pockets, even large chunks, of their portfolios into unconstrained multi-asset or fixed-income mandates. Such strategies allow asset managers – or in-house teams – to take a more tactical, dynamic approach to liquid assets.
US INSTOS TURN RISK-OFF TOO
Big asset owners outside Asia have been making similar moves. Alaska Permanent Fund Corporation (APFC), the US state’s $67 billion sovereign wealth fund, is one example.
“I’m very concerned about where we are in the cycle and I’m making some pretty concrete moves to de-risk the portfolio,” chief investment officer Marcus Frampton told AsianInvestor.
Other changes APFC has made for downside protection include upping its cash allocation to around 4% from around 1% two years ago, and nearly doubling its absolute-return hedge fund exposure to 6% from 3.5% in the past 18 months.
He sees it as particularly important to retain international exposure in light of the growing trend towards protectionism and the large potential downside for soaring US equities. If anything, the fund’s allocation to Asia, for instance, is set to rise to help diversify its portfolio risk.
The Alaska fund is also looking to sell private assets to free up capital and take more risk off the table while it still can.
It is about to enter the market with a relatively large private markets portfolio of limited partner interests in private equity, infrastructure and private credit funds that could raise over $1 billion.
“The secondary market is a seller’s market,” Frampton said. “We have some great liquidity on positions that we won’t have liquidity in if we enter a recession.”
PUBLIC PENSION WORRIES
Similarly, de-risking has re-emerged as a theme among US state pension schemes, said Jay Kloepfer, head of capital markets at San Francisco-based investment consultancy Callan.
Others echoed this view of US pension sentiment. “There’s been a definite risk-off feel [in recent years] – a lot of focus on downside risk management and a big switch towards quality-focused strategies,” said Paul Price, London-based global head of distribution at Morgan Stanley Investment Management.
According to Kloepfer: “Public pension funds in the US have marched pretty far out on the risk spectrum in pursuit of return. The standard allocation used to be 60% in growth assets and 40% in fixed income; and then it went to 70/30, then 80/20, and even beyond that in a few cases."
As a result, some are now mulling whether to take a step back “as the next downturn will be very painful for a portfolio with 85% in risk assets", he said.
They are considering whether their portfolios are set up to address a crisis. Part of that is having a part of the portfolio in highly liquid assets like US Treasuries, so that you can move when the market goes down, as well as have a flight-to-quality hedge.
But more recently demand has grown for trend-following strategies, factor-based investing using risk premia in multi-asset class portfolios, and even tail-risk hedging.
The challenge then becomes, Kloepfer added, how much to allocate to the risk-mitigation strategy? “If you put 10% or even 20% of the portfolio in something that you’re thinking of as a risk mitigator, what does that do to your expected return?”