Institutional Investors in Asia need to be granted the mandate and flexibility to take a long-term view, panellists agreed at an AsianInvestor forum yesterday.
The structure of institutional boards must evolve to ensure investors had the means to get the returns they need, speakers said, although awareness of that requirement was needed at a basic level, too.
The need for sound corporate governance in the region was also highlighted, with speakers pointing out that even large sovereign and endowments funds lacked the human capital needed to push it forward.
The panel on long-term investing at AsianInvestor’s 10th Asian Investment Summit in Hong Kong consisted of two asset owners: Wu Yibing, senior managing director and head of China at Singapore sovereign fund Temasek, and Kyungjik Lee, head of the global public market investment division at Korea’s National Pension Service (NPS). They were joined by Garry Hawker, Mercer's director of strategic research, and Paul Smith, global chief executive of the CFA Institute.
Hawker said the key to ensuring a long-term vision for institutions was getting stakeholders engaged and the right structure put in place initially. He used the New Zealand Superannuation Fund as an example of the kind of structure that encourages a long-term perspective.
"The fund has 85% invested in risk assets, but it has no mandate of outflows, therefore it doesn’t matter what happens day to day," Hawker said.
Moreover, he stressed that institutions needed clarity in terms of their long-term objective, “which includes a focus on what you’re trying to avoid in the short term.”
Panellists agreed that the short-term nature of individuals’ roles within a sovereign or other institutional investment team - when they are judged solely on a tenure that might only last two years - was a recipe for conservative thinking.
Lee of NPS said his fund still had to refine its asset allocation and reduce its domestic bias. It has increased global equity exposure from $6 billion in 2008 to $55 billion today, although it is now adding global equity exposure “very gradually” from the current level.
He noted that no public representatives on the governing board were particularly vocal in pressuring the NPS over its investment policy. “Everyone has an opinion and our governing committee has representatives from a variety of groups, including the labour unions,” he said.
“At the same time, our target return is quite high [5.8% per annum] while equity market returns are [historically] on a lower growth trend. So we have to take risk.”
Lee said NPS was looking long-term in the nature of its investments: “Execution costs are high, so in the global markets we go for bigger and longer-term strategic investments with reliable counter-parties.”
The forum heard that Temasek’s investment committee behaved no differently to any commercial investment entity, albeit that its portfolio operates a flexible and unconstrained approach. For all its freedom, though, its managers communicate in granular detail on the portfolio holdings and investment returns, especially over the long term.
As published in the annual Temasek Review paper, Temasek is a major allocator to China and was an early investor in Alibaba: a good example of the fund’s ability to take an opportunistic view. Fully 25% of Temasek’s assets are invested in China. In 2013, the company invested S$24 billion ($17.9 billion), of which S$10 billion went directly to Chinese investments.
The company’s approach to intrinsic value has led it to double down on its bets in China at times, such as in 2014, when the portfolio actually underperformed (returning 1.5%) owing to its heavy exposure to emerging markets. But by staying true to a long-term approach and having the flexibility to be opportunistic, the investment team has been able to satisfy its stakeholders.
For those still working on their fund structure and portfolio construction, Hawker recommended building flexibility into the fund from the start, “otherwise you will not be able to maximise equity or credit opportunities as they arise. Your asset allocation framework needs to allow for this.”
Taking into account both fund objectives and available human capital, Hawker said it was important a fund was able to evolve with these two factors in tandem. He pointed to the Canadian Pension Plan as an example where its policy has kept pace with the ability to invest in private markets.
It was suggested that corporate governance was more important in Asia, but that levels of engagement were still low by global standards.
One of the problems with governance is that increasing amounts of money is passively invested, noted Smith. “What are the large passive investors like BlackRock doing about engaging in corporate governance?” he pondered. “They are trying, but since by their very nature they are in the market forever, they need to engage actively in corporate governance.”
For asset owners, Smith suggested even large sovereign and endowments funds in Asia were "not set up with the human capital to engage with corporate management on governance issues. It’s one of the skills that needs to be developed.”
The asset owners agreed. No one, it was noted, has yet come up with the right formula for working with companies to create the best form of corporate governance for the benefit and protection of all investors.
All comments made by Wu of Temasek were non-attributable by prior arrangement.
The 10th Asian Investment Summit concludes today at the Ritz-Carlton hotel in Kowloon. AI Week ends tonight with a black-tie celebration dinner at the Ritz-Carlton, where AsianInvestor’s Asset Management Awards will be presented to the winners.