Rising alternative asset prices is spurring demand for more liquid proxy investments such as real estate investment trusts (Reits).

It is one of several themes discussed at last week's 13th Asian Investment Summit hosted by AsianInvestor, which also highlighted how corporate governance is creeping up the region's pension fund agenda.

Among the new-found Reit devotees is Korea's Public Officials Benefit Assocation (Poba), one of Asia's keenest exponents of alternatives investing, which has seen pension funds beat a path to non-traditional assets such as private equity, property and infrastructure and away from mainstream bonds and equities. 

With their longer-term horizons, pension funds are seen as ideally placed to eke out the required value from such illiquid investments. 

However, times may be changing -- not least at Poba, which now has more than 50% of its assets under management (AUM) in alternative investments, according its chief investment officer Jang Dong-hun.

"It's really difficult to enjoy that illiquidity premium as much as we could have before, so these days we have started to think about and consider liquidity issues when we invest in alternative investments," Jang said at the event hosted by AsianInvestor.

Making the numbers work has got harder to do as investors have bid alternative asset prices higher, he said, which is why Poba has begun investing more in Reits.

"This year, we committed some investments in real estate investments, using real estate investment trust products because we saw it giving us higher liquidity," he said.

Poba had no investments in Reits last year but so far this year has invested some $70 million to $80 million into US-listed Reits, Jang said in a phone interview after the event.

“We deploy in office, retail, and different kinds of Reits sectors, and we think we would get returns of about 5-6%,” he told AsianInvestor.

ESG ENHANCEMENTS

Corporate governance is another growing driver of returns for Asian pension funds, Lau Ka-shi, managing director and chief executive of Hong Kong-based pension product distributor BCT Group, said on the same panel.

“Eight out of the last 10 years, the MSCI ACWI ESG leaders index has outperformed the MSCI AC world index, and the difference in performance is 85% outperformance, and the risk is 91% less volatile,” she said.

The MSCI ACWI ESG leaders index has shown higher yearly returns than the MSCI AC world index every year from 2008 to 2017, except for 2012 and 2017.

A responsible, social vehicle like a pension fund should be long-term and looking at sustainability as well, so BCT pushes its external fund managers to show how they are actually applying stewardship and corporate governance practices into their investment strategies.

“We’re not looking for an ESG fund, per se, but we want to look at risk reduction, ESG, and climate change. They are all affecting a society and a community for the long term,” Lau said.

Corporate governance factors are also growing in popularity in Korea, Jang said. “I know some institutional investors, including me and [National Pension Service of Korea] and other institutional investors, have strongly committed to using the shareholding rights and corporate governance issues.”

Hong Kong's Mandatory Provident Fund Schemes Authority (MPFA) is also taking steps to make corporate governance issues a priority, said Stella Yiu, its head of investment regulation.

“We have of late raised the awareness of the importance of governance, in particular with the MPF trustees and fund managers, in line with the thinking and development in this area,” Yiu said.

That includes checks and balances processes for high-level decision-making on investment management, how proxy voting ought to be conducted, and whether more active voices ought to be represented in the investment process for pension funds, she said.

Of course, Hong Kong's compulsory MPF saving scheme does not allow for alternatives investments, so there are no related governance issues there.

But there are different strategies that can be used even within equities, BCT's Lau said.

"We could talk about active, passive, factor investing, so there's also a way to do innovation. Part of the value-for-money proposition that we all talk about is about driving better performance, but also because lower fees or exchange traded funds (ETFs) could be a good tool for certain markets and for certain sectors," she said.

AsianInvestor will host its 12th Korea Institutional Investment Forum on June 20 in Seoul. For more details contact Terry Rayner via email or on +852 31751963.