Nearly a decade of rock-bottom interest rates have pushed many investors out of their comfort zones and towards illiquid alternatives in increasing numbers in search of higher returns. Yet the prospect of reflation in conventional assets could see some institutions – such as insurance firms – move back towards more traditional investments, say market participants.
Jeffrey Tan, Asia regional investment director at Belgian insurer Ageas, said that if US 10-year Treasury yields were to climb from today's levels by 150 basis points, insurers may consider a move back to conventional assets, such as corporate and government bonds, and away from alternatives such as private equity.
Indeed, many institutional investors were reluctant entrants into alternatives in the first place, so many may be glad of an excuse to get out, noted Markus Ohlig, head of the investment management practice for Europe and Asia ex-Japan at research house Greenwich Associates.
Many insurers, in particular, remain uncomfortable with investing private markets, because of the complexity and illiquidity of private markets, the lack in most cases of industry benchmarks, and their minimal internal expertise in this area, added Zurich-based Ohlig.
Tan emphasised the large workload required. This is partly a function, he said, of very high return dispersion in sectors such as private equity. This means there is “little point” in entering private markets unless you are prepared to commit “a good chunk of your assets: between 0.5% and 3% is a good start”.
Insurers and pension funds’ risk management frameworks are particularly poorly suited to investing in illiquid assets, said Ohlig.
Mark Konyn, group CIO of Hong Kong-based insurer AIA, confirmed that while his firm was steadily building positions in illiquid alternatives, it took time to demonstrate internally how they fitted with the firm’s wider risk profile. He was speaking at AsianInvestor’s Insurance Investment Forum last month.
Moreover, private equity fees are high; good managers in this space often charge 1%, said Ohlig. And, with rising demand for such assets, the opportunity set has dwindled. “I know a lot of asset managers in this space who have had no issues raising capital but plenty of problems deploying it,” he noted.
Moreover, some institutions have expressed concern about the illiquidity premium being eroded as more money pours into such assets. Paul Carrett, group CIO of Hong Kong's FWD Insurance, and others insurance executives have made this point to AsianInvestor.
Pensions to keep the faith?
Still, many pension funds are likely to maintain interest in the illiquid space in a reflationary environment, said Ohlig. They might demand wider credit spreads and a few of the very cautious may retreat, he observed, but by and large the greater spreads available will remain appealing.
“Most pension funds have completed the learning curve, having acquired the expertise and become familiar with these investments,” added Ohlig. “There may be an impact at the margins, but generally the appeal is likely to continue.”
Moreover, wealth managers are unlikely to rush out of private markets any time soon.
For illiquids such as infrastructure, for instance, government policy is a driver, said Frank Lee, acting chief investment officer for Hong Kong at Singaporean bank DBS. “Infrastructure is one of our favourite sectors in the near term. Different countries are planning to stimulate their economies through fiscal policies, including the US, China and other Asian countries.”
US president Donald Trump has committed heavily to American infrastructure spending, while Beijing is focused on the one belt, one road project aimed at building transport connections through central Asia. Moreover, countries such as Indonesia and the Philippines are pushing big construction programmes. That said, some argue that governments need to spend more on this front.