Asia Pacific's family offices are a nimble bunch and never more so than when it comes to ESG where they're already proving to be ahead of the regulators.
The impact of Covid-19 has accelerated some unwelcome investment trends, leaving asset owners struggling to keep up in a world that is changing faster than they had anticipated.
Interest rates have hit rock bottom faster than most economists had forecast pre-pandemic and look set to remain that way for a long time to come. Meanwhile the massive glut of government spending to sustain economies has placed governments across the world in deep holes of debt. That will require funding.
The result? A likely upsurge in bond issuance, at lower returns than expected.
Meanwhile, the world continues to respond to the mounting peril of climate change, and the evolution of technology and data offers opportunities for those that can seize them.
For asset owners, this combination is likely to require a thorough self-evaluation. Do they have the internal resources to overcome these set of issues?
“If you go back a decade there was a reticence to invest in the necessary systems and people expertise at asset owner level, and that partly played out well to asset managers, as they could fill that gap,” said Trevor Persaud, head of investment solutions at insurer AIA.
“I think that will be the interesting piece over the next 10 years: asset managers have attempted to bridge the gap and solutions and fiduciary advisers. But asset owners will need to face the question: are you a GIC [with massive internal investing resources], or are you a statutory board [which often outsources its investing]?”
FAR LOWER, FAR LONGER
The investing community had long assumed that investment returns in bonds and
equities would fall to lower average levels during the early 2020s than in previous periods. The impact of Covid-19 has exacerbated such concerns.
With the US and UK having slashed rates to virtually zero, and the eurozone and Japan already there, most of the world’s largest debt issuers are offering miniscule levels of return. China, the only other major bond issuer, has cut its rates too, although they remain above those of the other two big economic blocs. Other Asian markets, including Korea, Thailand and Taiwan, have followed suit.
“Essentially what we had with the ramifications of Covid is a more likely period of lower interest rates for longer and longer,” said Roger Urwin, founder and global head of investment content for the Thinking Ahead Institute. “And, of course, that is not consistent with good pension outcomes.”
It’s also a troubling proposition for life insurers, who need to cover sometimes generous fixed rate policy returns, and public pension funds that need to prepare for a spike in retirees in a decade or so.
To manage this, asset owners will have to diversify. Those that have yet to embrace alternative assets, factor strategies and focused investments in riskier areas of debt will need to do so, likely adding at least 15 percentage point exposures to their portfolios.
“When I talked to Korean asset owners and other global asset owners and what other global asset owners think and plan next 10 years, I noticed that there is a lot more demand to invest in alternatives,” said Jang Dong-hun, chief investment officer for the Public Officials Benefit Association (Poba). “They do not like being more exposed to market volatility.”
At the same time, asset owners need to better understand companies with huge amounts of intangible assets, such as the tech giants that bestride the economic landscape today. In 2018, intangible assets of S&P 500 companies were estimated to be worth $21 trillion.
“Investors will have to better get their heads around what intangible assets are, and their value,” said Matt Whineray, chief executive officer of New Zealand Super. “They don’t fit well with the historical models we have all grown learning about, but the shift from tangible to intangible has been stark; we have seen concentration in some industries, with five stocks contributing most to the upswing.”
This article was adapted from the cover story of AsianInvestor's 20th anniversary edition, which was previously published in late June.
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