Japanese and to a lesser extent Korean insurers and pension funds have been allocating heavily to US fixed income but are now increasingly eyeing European bonds and low-beta equity strategies.

So says a senior executive at Wells Fargo Asset Management (WFAM), which is seeing swift growth in the capital it invests on behalf of Asian institutions. 

Asia-Pacific investors are looking to further diversify sources of fixed income yield and to reduce equity risk, Deirdre Flood, head of international (ex-US) distribution at the San Francisco-based firm, told AsianInvestor last week.

WFAM has trebled its Asia-sourced assets under management to $17 billion as of the end of March this year from $5.7 billion at end-2014. It added $3.1 billion to the total in the first quarter of 2019 alone, London-based Flood said.
Deirdre Flood, WFAM

These flows have been largely driven by institutional clients in Japan and Korea pouring money into US fixed income mandates, Flood said after a trip to those countries and Hong Kong last month.

Her comments on US bond demand tally with evidence from Japanese insurers' updates and feedback from other industry experts.

But European bonds have been attracting more interest in recent months too, she added, as have alternative risk premia strategies. The latter are generally rules-based, multi-asset, long/short strategies historically employed by hedge funds, but usually provided on a lower-fee basis.

“Many institutions [in Hong Kong, Japan and Korea] are still under-allocated to global fixed income and have still been carrying a home market bias,” Flood said, though this continues to change. 

“In my recent trip [to Asia] I’ve seen institutions focusing on diversifying more into different fixed income assets internationally,” Flood told AsianInvestor.

There’s been a marked increase in interest in European fixed income, she said, in particular driven by the high cost of hedging US bond mandates back into yen.

Moreover, Asian asset owners see good value in Europe now, she added, partly perhaps because of the political turmoil taking place around issues such as Brexit and other populist developments. That said, it’s clear from their discussions with WFAM’s Europe portfolio managers that they would prefer to see stability before going into mandates, Flood said.

WFAM is in talks with several Asian investors about European bond mandates but hasn’t yet closed any such deals, she added. 

Asian institutions are also keen on private debt, and WFAM is likely to launch a US-focused offering in that space in the first half of 2020.

EQUITY DOWNSIDE FEARS

Another big driver of allocation trends in Asia has been a focus on more defensive strategies, including in the equity space, she noted. 

“As in the rest of the globe, there’s a stark recognition we are 10 years into a bull market – excluding a few minor, short periods of correction," Flood said. "Institutional investors are sophisticated enough to know they can’t time the market – so are considering how to participate [in markets] and yet increase their downside protection.”

One of the biggest concerns for the asset owners that Flood spoke to in Asia are the perceived stretched valuations in the global equity markets.

In response, some institutions have been looking at low-beta long/short investments, Flood said. WFAM was initially offering a 0.6 beta product but some clients have wanted to reduce market risk further, such as by bringing it down to 0.3 beta, she noted. The firm launched a global absolute return product designed around this demand. 

WFAM has also been looking to market its multi-asset team’s new alternative risk premia strategy in Asia. The quantitative, hedge fund-like product invests across global equity, fixed income, currency and commodity markets and targets a return of around 5%.

It’s in the last six months that clients in Japan and Korea have noticeably been talking about making changes to get more defensive, Flood said. This goes for both sovereign wealth and public pension funds across the region, including Korea, Japan and Hong Kong, she added. 

ESG FRONT AND CENTRE

Another major theme during Flood’s Asia trip was that of sustainable investing, and the interest around it was greater than she expected. “Investors brought it up early in almost every discussion I had [of which there were at least 20],” she said. “It wasn’t just a niche topic tagged on at the end; it was at the core of every conversation.”

This gathering momentum around environmental, social and governance (ESG) issues is clear from the the rising number of asset owners signing up to the United Nations' Principles for Responsible Investment. Recent examples of institutions making such a commitment include Malaysia's Employees Provident Fund and Hong Kong's Exchange Fund

Morever, regulators in the region, such as the securities watchdogs in Hong Kong and Taiwan, are making moves of their own to encourage best practice around sustainable investing and disclosures in this area. 

AsianInvestor is holding its 8th Japan Institutional Investment Forum on June 18 in Tokyo. The event will consider the pressing investment needs for Japanese asset owners, including the need to find yield and yet avoid excessive risks as the macroeconomic outlook grows less certain.

For more details, please visit https://www.japaniif.com/.