While stock markets may have been suffering big outflows this year, investors have also been taking risk off the table in unlisted markets.

Institutional investors in private equity, for instance, are taking the view that the current rise in valuations is "getting long in the tooth" and that a market correction may be due, said the Asia head of business development at one of the world's largest alternative asset managers.

“Generally, investors globally and in Asia are being a little cautious, and that is causing a flight to quality,” she told Asianinvestor on condition of anonymity. 

The executive explained that limited partners (LPs) – that is, investors in private equity funds – were turning away from sector- or country-focused strategies towards more diversified, pan-Asia strategies.

“Some high-flying sector funds have outperformed in the past cycle,” she noted. “[Investors] are now thinking about taking some of those chips off the table, having received some nice gains.”

Investors are willing to go a bit broader and look at flexible mandates in order to be more defensive, rather than targeting the more specialist assets “that may have had a nice pop over the past several years”.

Yet this is not the case for all asset owners. At one US pension fund, the head of Asia investments told AsianInvestor: “In our observation … LPs increasingly want to do more single-country funds, rather than pan-Asian funds.”

Hugh O'Reilly, OPTrust

Meanwhile, some institutions have certainly been reducing exposure in other private asset classes after a strong run-up in prices.

Ontario Teachers’ Pension Plan (OTPP) cut its infrastructure allocation to 9% from 11% in the 12 months to June 30. The aim was to realise gains in a “very well-bid” asset class, said chief executive Ron Mock in late August.

Infrastructure, accounting for 10% of OTPP's total net assets as of end-2017, was the fund's second-best performing asset class last year, returning 18.2%, only just behind private equity with 18.8%. The fund's total net return for 2017 was 9.7%.

Another Canadian pension fund, OPTrust, has also been selling assets this year – notably real estate and infrastructure – in order to realise some gains, chief executive Hugh O’Reilly told AsianInvestor. He declined to quantify the amount.

Last year OPTrust generated returns of 21.6% from private equity, 14.7% from real estate and 11.0% from infrastructure, contributing to its total investment performance of 9.5% for 2017.

UNCERTAIN OUTLOOK

While private asset investments are multi-year buy-and-hold strategies that generally ride out short-term market volatility, there is a widespread view that a major downturn is coming. For instance, many expect a recession in the US in the next three years or so. 

The outlook is made yet more uncertain by today’s uncharted economic territory, with quantitative easing being rolled back by the Federal Reserve and worries over trade and geopolitical tensions fuelled largely by US President Donald Trump.

In response, asset owners have been paring their stock market exposure, with US-domiciled US equity funds among the notable losers. They experienced net outflows of $176.3 billion between January and September, leaving them with a total of $8.05 trillion.

On the whole, stock markets have suffered this year. The MSCI World index plunged 7% in October alone, taking its overall drop in 2017 to 3.7%, while the MSCI emerging markets benchmark has fallen 15.3% since January 1. 

Hence cuts to stock exposure appear to be justified. Canada Pension Plan Investment Board, Ontario Teachers’ and Korea’s Public Officials Benefit Association have all trimmed their public equity allocations in the past year or so. In fact, the latter institution has almost halved its global stock exposure since the start of 2017.

UNDERLYING COMPANIES

Private equity investments have not been not affected in the same way, given their longer time horizon. Indeed, overall private equity allocations at many institutions have continued to grow.

Ben Chan, Asia head of Ontario Teachers, said macroeconomic issues do not really impact the C$194 billion ($148 billion) fund’s long-term private equity investments on a short-term basis.

What the Canadian plan does take into account – and discusses with its portfolio companies and investment partners – is how geopolitical or other risks might affect the underlying businesses. “For example, do we reposition our production base [as a result of trade tensions and tariffs]?”

"It’s more about how [macro trends] affect our corporate partners [than about our own investment strategy],” Chan added. “We speak to them a lot, exercising our rights as a shareholder.”