Asset owners in Asia need to develop a less constrained allocation approach, amid a growing trend to build investment strategy teams and cut fund manager rosters, said panelists at AsianInvestor's Asian Investment Summit yesterday in Hong Kong.
There is a realisation that having a lot of managers is not necessarily a sensible way to go, said Jayne Bok, head of sovereign advisory at investment consultancy Willis Towers Watson.
“After a certain point, any additional managers they have are not going to make an iota of difference to the overall return,” she noted. “So we are seeing the Koreans and others move into passive and smart beta.”
This is a global trend – for example, the $290 billion California Public Employees Retirement Scheme has cut its number of external fund managers by 50 (from 212 to 159) in the past nine months.
Bok also pointed to the build-up of internal capabilities in Asia.
Korea Investment Corporation has been a pioneer in building up its strategy team, with National Pension Service following suit and other Korean retirement funds going through the review process.
It’s a major change occurring across the region that will drive down costs and reduce wastage, said Bok. “You can tell which ones are the smart investors based on the size of their strategy team,” she noted, citing the Singapore sovereigns and Australia's Future Fund as examples of institutions who are well advanced in this.
For smaller institutions, having a large internal strategy team is not an option, but Bok said any fund of $20 billion would be well placed to bring some of the management in-house.
There are exceptions to the insourcing trend, of course. As Korea’s Public Officials Benefit Association looks to boost its foreign exposure, it is continuing to seek external equity and fixed income managers, said chief investment officer Jang Dong-Hun. The state fund is also increasing its use of instruments such as collaterised loan obligations and private debt, he added, speaking on the same panel.
“Once you have 50 managers with all sorts of different strategies, you can achieve proper diversification,” said Lee Dong-ik, a former CIO of Korea Investment Corporation and now adviser to Singapore's Temasek, but getting there takes a long time, he added, especially since board approval can take years.
Moreover, smaller pension funds cannot gain diversification in this way, so they need to use funds of funds, said Lee.
Other speakers, too, were advocating a less strict adherence to traditional allocations and a need to consider private-market investments, including private credit and debt, derivatives and smart-beta strategies.
Investors need to look beyond traditional global bond benchmarks, agreed Keith Patton, head of multi-strategy fixed income at BMO Global Asset Management.
An unconstrained approach to bonds can produce alpha, he noted, but taking a basic bond index approach “could be the worst decision you ever make”. Derivatives are also crucial, he added, and will give asset owners greater confidence by reducing the cyclicality aspects of their investments.