The Government Pension Fund (GPF) of Thailand and the New Zealand Superannuation Fund (NZ Super) plan to increase allocation to real assets, particularly in private equity, infrastructure and real estate, their chief investment officers revealed.

During an online panel discussion on the first day of the Asian Investment Summit held by AsianInvestor, Man Juttijudata, chief investment strategy officer of GPF, said that he plans to increase allocation to alternative assets to up to 18% "in the near future", with a focus on real assets.

Man Juttijudata, GPF

The biggest pension fund in Thailand has raised allocation to alternative assets from 5% pre-Covid-19 to 13% now. It is about to increase the proportion to 17% to 18%, he said, without specifying a timeframe.

This includes investment in private equity, global infrastructure and real estate, as real assets give a better risk-return trade-off between return and volatility during periods of low bond yield, Juttijudata said.

GPF manages Bt1 trillion ($32 billion) assets as of July 2020. Over 60% of assets went to fixed income, and about 15% was in equities.

It has been the pension fund’s strategy before the pandemic, which only accelerated the shift, he pointed out. Domestically, GPF’s real estate appetite will be focused on central business district areas, which are of good liquidity, Man said. On the offshore side, he noted that investment will be outsourced, without giving preference for locations.

Similarly, Stephen Gilmore, chief investment officer of NZ Super, said during the summit that the sovereign wealth fund will expand its exposure to real estate and infrastructure gradually, depending on pricing and expected return.

With a portfolio of $31 billion of assets with some 80% in equities, NZ Super has a stable risk appetite oriented by growth, Gilmore noted. The investment team want to make sure investments in real estate provide better risk-adjusted return than the approximate combination of equities and bonds.

Even if the price of a targeted project is higher than its historical average, the asset could still secure a place in the fund's alternatives portfolio if it is less expensive than other assets, he said. 

Stephen Gilmore, NZ Super

Asset owners have increased their appetite for alternative assets. Gilmore said this underlines the importance of discipline in investment when facing a crowded tender.

“We are less likely to get involved in those highly competitive areas, because you could be dealing with the winner’s curse problem,” he said.

He offered the example of the rise in distressed debt after the pandemic broke out, as many investors had rushed into the asset class and tried to secure a good deal as soon as possible in both private and public markets. 

However, Gilmore also noted that "if you're trying to get seed through more traditional private market activity, it can be more difficult".

He stressed that NZ Super keeps its advantages in these markets through established internal capabilities, improved dialogue with partners, and geographical diversification of capital.

COMBAT INFLATION

On the rising concern over inflation, both asset owners said they are not too concerned about it at the moment.

Man said that the US 10-year Treasury's yield widening to close to 2% has led GPF to reduce its fixed income duration benchmark from eight years to four years. If the yield continues to rise up towards 3%, the pension fund will further reduce the duration, he added.

GPF is also increasing its proportion of commodities in the short term to combat inflation, which has recently reached a 13-year high in the US. While this is a concern, Man predicted that equities and commodities, which tend to perform better amid inflationary environments, will catch up.  

Levels of trading in commodities have risen in the past year as investment banks saw revenues related to the raw materials jump 20% from the year prior. However, there have been concerns that surprise events such as the pandemic, the Colonial Pipeline hack and the Suez Canal blockage, pose supply chain risks to commodities.

For the equities-heavy NZ Super, Gilmore said there will not be any structural shift in its portfolio in the face of higher inflation. But he noted that generally, real assets such as real estate and Real estate investment trusts (Reits) protect investors against inflation. 

A recent Asset Owner Insights survey by AsianInvestor also found that Asia-based asset owners plan to increase allocation to real assets, particularly in private equity and infrastructure.

The Asian Investment Summit is happening from May 31 to June 4, featuring asset owners as they discuss their investment strategies for 2021 and beyond. Click here to register.