Asian pension funds are following in the footsteps of their global peers and increasingly turning to overseas investments and alternatives to boost returns – a trend seen likely to continue, according to industry experts and the findings of the Global Pension Assets Study 2018 by Willis Towers Watson.
The Willis Towers Watson (WTW) study released on February 5, which covers 22 pension markets around the world with cumulative assets of $41.3 billion, notes that global asset allocations to real estate, private equity and infrastructure grew from about 4% in 1997 to around 20% at the end of 2017.
The study also notes that among the seven most developed pension markets – Australia, Canada, Japan, Netherlands, Switzerland, UK and the US – there is a clear sign of a reduced home bias in equities, with the weight of domestic equities falling, on average from 68.7% in 1998 to 41.1% in 2017, the report said.
Both trends -- the growth in both alternative and overseas investments -- are prevalent among Asian pension funds, according to Wina Appleton, Asia Pacific retirement strategist at JP Morgan Asset Management.
Talking to AsianInvestor she pinpointed three key reasons for the drive: the need for higher returns, diversification into broader markets and opportunity sets, and higher liquidity.
“Many pension funds in the region are realising they cannot rely solely on domestic bonds and equities to generate high returns as they used to in the past,” Appleton said. “They now see that with similar levels of volatility they can get better returns overseas, so they are now looking for quality high-yielding investments that offer relatively higher returns.”
It’s also quite risky to be invested in only one geographical market, she added.
In regional markets such as Malaysia and Korea, pension funds are concerned about the heavy influence their big-ticket purchase or sale decisions can have on local financial markets.
“It has been another catalyst for why they are looking overseas and why they are moving into other asset classes such as alternatives,” Appleton said.
Apart from looking overseas, Asian pension funds are increasingly eyeing illiquid investments to benefit from higher illiquidity premia, according to some experts.
Jayne Bok, head of investments for Asia at WTW, noted that while smaller-scale pension funds continue to rely on a mix of domestic bonds, equities and cash, larger pension funds such as Japan’s Government Pension Investment Fund (GPIF) are experimenting with higher alternative allocations.
GPIF, which is the world’s largest pension fund, recently awarded its first-ever infrastructure mandate as part of an alternative fund-of-funds multi-manager strategy, as reported by AsianInvestor.
“Alternative allocations among Asian pension funds are much lower compared to their developed market peers, but given that Asian funds only started investing in this asset class recently, those allocations are growing rapidly,” she told AsianInvestor.
Examples of the growing appetite for global and alternative investments are much in evidence across Asia and seemingly growing.
Korea’s National Pension Service has said it intends to lift the proportion of its overseas investments by increasing the share of its investments in global equities, which will make up around 25% of the overseas allocation by the end of 2022, up from 15.3% at the end of 2016, according to a local media report in May 2017.
According to its five-year strategic plan, global investments will account for 40% of overall investments by the end of 2022, up from 27% at the end of 2016, the report noted.
The pension fund also embarked on a recruitment drive to build its offshore private-market exposure last year, as AsianInvestor reported.
In Malaysia, the Employees Provident Fund (EPF) credited global investments for generating nearly half of its third-quarter investment income. As of September-end EPF's overseas investments accounted for 30% of its total investment assets.
Diversification into different asset classes across various countries and currencies had helped the pension fund to record higher income for the quarter, despite significant differences in market performance globally, EPF said.
In November 2017, the Government Service Insurance System (GSIS) in the Philippines issued a request for proposals from external asset managers for an $800 million global multi-asset strategy.
Japan’s GPIF, meanwhile, announced a new policy on asset mixes in October 2014 that saw its limit on overseas bonds and equities combined rise from 23% to 40%. According to its December 2017 results, the world’s biggest pension fund has already hit its limit for global equities (25%) and nearly done so for international bonds (15%).
The WTW study covered seven Asian markets -- Australia, Japan, China, Hong Kong, India, South Korea and Malaysia.