Myth 10: Asset allocation is the starting point

Our survey of Asia’s largest allocators finds the asset allocation conversation has evolved from counterweighting asset classes to balancing liquidity and illiquidity.
Myth 10: Asset allocation is the starting point

Over the past few weeks AsianInvestor has broken out the findings of its annual survey of the largest institutional investors across Asia Pacific, based on our AI300 ranking (published in our July magazine).

As a result we sought to dispel 10 myths about Asian asset owners, facts that market observers may have thought they knew about the region’s most sophisticated investor base, but which our survey did not corroborate.

The trends we identified included appetite for exposure to global markets and alternative assets; appreciation of active over passive; strong interest in direct and co-investment; and a preference for outsourcing over insourcing.

Perhaps most illuminating were the findings on China strategies, with Asian asset owners recognising the nation’s growing economic influence and affecting the way they construct their portfolios (although appetite for RMB-denominated assets remains muted due to the lack of investible opportunities).

Overall our survey, sponsored by Goldman Sachs Asset Management, received 100 responses from 95 institutions across 15 jurisdictions including central banks, sovereign wealth funds, pension funds, insurance firms, commercial banks and official institutions.

This year commercial banks made up a greater proportion of our respondents (34%) than in the past. To ensure an accurate picture of how Asia’s long-term institutions were allocating money, we presented two sets of results: one including commercial banks (All) and one excluding them (non-banks). It enabled us to see how banks behave differently.

Asset allocation is the starting point for portfolio construction

It would be premature to say this traditional approach is no longer true, but our AI300 survey this year pointed to a change of direction.

Asked how they use consultants, one in four long-term institutions said they didn’t. Of those that did, 33% employ them for asset allocation purposes, which is a rise on last year.

But what is clear from the overall results is that the asset allocation conversation is more nuanced than ever before. The prolonged low-interest-rate environment, in which volatility has been suppressed for so long, has driven long-term institutions to adopt a more flexible approach.

As they seek alpha amid the return of volatility, they are more likely to be basing decisions on balancing liquidity and illiquidity.

We can see asset owners are ramping up risk including rotating their fixed income portfolios, while downgrading passive exposure. They are more diversified across the board, through a combination of more direct investing and more outsourcing.

They are having to face the discovery that quantitative easing is not the tool to drive economic recovery: one in five forecast that 10-year US Treasury yields will be below 2.5% in 12 months’ time, (the actual yield was 2.3% at press time).

They are only now coming to realise the impact China has on global economics. This is a new financial landscape. Asset allocation is no longer about equities versus fixed income versus alternatives. It is about how asset owners can balance their portfolio to take advantage of the long-term nature of their capital by being flexible and seeking the best return relative to investment.

“Asset allocation is one guide about how you should structure your overall portfolio, but it is not the only guide, because your original assumptions about how those asset classes perform and their characteristics, whether it is liquidity or volatility, are no longer valid,” said Sheila Patel, chief executive of international at Goldman Sachs Asset Management.

“This is more about a 3D view of your portfolio," she added. "Your asset allocation can’t be a pie chart any more.”

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