Asian institutional investors may be increasing the proportion of money they manage in-house, but the growth of their assets is outstripping their ability to build up their investment capabilities, according to Cerulli Associates.

As a result, third-party asset managers will continue to receive significant allocations, finds a report released yesterday by the research house. Korea’s National Pension Service (NPS), for example, began managing overseas equities internally in 2010.

The in-house proportion reached 5.8% in March this year, more than double the 2011 figure, and will likely increase as the fund – which had $368 billion in AUM as of December 2012 – continues to expand its investment capabilities, noted Cerulli.

Other investors to have boosted their in-house investment include Taiwan’s Labor Insurance Fund (LIF), which managed 69.1% of its assets internally at the end of last year, compared with 65.1% in 2008. The National Pension Insurance Fund (NPIF) meanwhile now oversees 82.7% of its assets internally, compared with 75% in 2010.

Yet third-party asset managers shouldn’t be concerned, argues Cerulli.

In the case of NPS, “external managers need not fret as the fund’s assets are growing much faster than its investment team can handle, prompting more outsourcing opportunities”. Areas of interest include Asian equities, Chinese equities – when NPS receives additional qualified foreign institutional investor quota from the Chinese authorities – and alternatives, adds the report.

Asian sovereign wealth funds (SWFs) in particular are experiencing rises in their overall AUM.

“There is a silver lining for third-party asset managers. Due to SWFs’ growing asset bases, a slim percentage of outsourced assets can still translate into sizeable amounts in absolute terms,” Cerulli says.

It points to Korea Investment Corporation (KIC), which handed out about one-third of its assets in 2012, compared to 28.1% in 2011, 29.3% in 2010 and 35% in 2009. In absolute terms, outsourced assets rose every year during the period, rising steadily from $9.8 billion in 2009 to $17.1 billion last year. KIC managed $61.6 billion as of March 2013, according to AsianInvestor figures.

Regulatory changes will have a significant impact on Asian asset owners and managers, with Cerulli citing the relaxing of rules for China’s insurance companies in particular.

As of June 2013, mainland insurers have been allowed to set up fund management units to offer mutual funds to retail and institutional investors. This will introduce more competition in China’s crowded mutual fund sector, but it will also provide opportunities for global fund houses to participate in China’s retail and institutional markets, provided they team up with the right local insurers.

Australia firm AMP Capital and mainland firm China Life were the first to exploit the rule change, and others are set to follow.

Moreover, relaxing limits on institutions’ foreign investments will provide clear opportunities for asset managers looking ahead, says Cerulli.

Another trend is Asian asset owners' preference for alternatives. While allocations to such assets are still a small percentage for most institutions, investments are rising.

Malaysia’s $169 billion Employees Provident Fund (EPF) had 2% of its assets in alternatives last year, an amount that quadrupled from 2008. Meanwhile, Korea’s NPS doubled its percentage of alternative assets to 8.5% in 2012 compared to 2008, and China Investment Corporation allocated 32.4% to alternatives in 2012, up from zero in 2008.

When making direct real estate purchases, Asian institutions place a great deal of importance on notable buildings.

“They are likely to “assess whether it is a trophy asset – that is, a grand building in a prominent city that would look good in an institution’s portfolio and help it garner favourable headline news, on top of stable returns,” the report says.

NPS, EPF, Singapore’s GIC, Malaysia’s second biggest state pension fund KWAP and several Korean insurers have all invested in landmark properties in London and the US in the past few years.

By Cerulli’s measure, Asia ex-Japan institutional investors' investable assets, which includes pensions, insurers, SWFs and state funds, exceeded $10 trillion for the first time in 2012, a 9.6% increase over the 2011 figure of $9.2 trillion.

Hong Kong and Korea were the only two markets where institutional assets posted double-digit increases, growing 16.6% and 12.2%, respectively.

Cerulli predicts that the region’s institutional assets under management will hit $16.1 trillion in 2017, noting that it expects stronger growth from institutions in Southeast Asia given that these markets remain underdeveloped and are growing from a low base.