Southeast Asia pensions to lead new mandate issuances

Swelling assets are prompting regional pension funds to look beyond home markets and outsource alternatives and ESG investments, say experts.
Southeast Asia pensions to lead new mandate issuances

Pension funds accounted for the highest percentage of institutional addressable assets in Southeast Asia last year and are set to continue leading the way for new external mandate issuances from the region in 2021.

As they do so, they are particularly likely to seek external fund managers for key investment mandates into niche areas such as environmental, social and governance (ESG) mandates, alternative assets and overseas investing, say investment consultants.

Shannen Wong, senior analyst at research and analysis firm Cerulli Associates and lead author of a recent report on pension funds in the region, told AsianInvestor she expects pension funds in Southeast Asia to increase allocations to alternative and offshore markets, as prolonged low interest rates and growing assets push them toward higher yielding investments.

Shannen Wong, Cerulli

The Cerulli report, which was published on May 18, showed pension funds accounted for 33.4% of the total $369.2 billion addressable assets – that is, those that institutional investors outsourced to third-party managers – in Southeast Asia in 2020.

The issuance of new mandates slowed due to the pandemic in 2020 -- institutional addressable grew 9.8%, compared to 12.4% in 2019. Wong expects them to pick up in 2021, although she said the firm has no concrete estimates.

Consultants concurred with this finding, and said they expect pension funds to outsource those strategies with which they are less familiar, such as alternatives, offshore and ESG.

Kar Wye Leong, WTW


“I would expect pension funds in Southeast Asia to be looking into ESG mandates given the recent push in this area by the industry globally,” said Kar Wye Leong, associate director of investments for Asia at Willis Towers Watson.

“A number of funds are also in the midst of ramping up their regional diversification plans so the different flavours of global equities could be an area that these funds will be looking to allocate to.

"Both of these mandates are likely to be outsourced given they would be new to the funds, and it would be a good opportunity for them to learn from third-party managers who have been doing it for some time.”

Janet Li, Mercer

Janet Li, Asia wealth business leader at Mercer, agrees: "We have generally seen an increase in alternatives and offshore investment with respect to Southeast Asia pension funds. We expect these trends to continue given the chase for yield and ongoing diversification of investment portfolios. 

"Whether pension funds would outsource or not depends on their investment resources, governance and asset class capability. Generally, we expect pension funds to be leveraging external asset managers’ investment capabilities to build scale quickly, especially in the private markets space."

Mark Wightman, Asia-Pacific wealth and asset management consulting leader at EY, highlighted specific alternative asset classes to which he believes pension funds will allocate capital.

“Over the last few years we have observed institutional assets growing in private equity and real estate, whilst there has been a reduction in hedge fund allocations," he told AsianInvestor. "We expect this to continue. We are also seeing growing interest in alternative credit.”


Managers surveyed for Cerulli's report together represent more than 70% of the region’s assets under management. They expect anticipate that ESG-related strategies, low-cost strategies and global equity to be popular in Malaysia and Thailand in 2021 and 2022, according to Wong.

In the Philippines, they expect multi-asset to be the top strategy for institutions, in line with recent years. “Global equity, domestic equity, low-cost strategies and Asia equity will also be among the top five investment strategies [in the Philippines].”

For Indonesia, managers predict domestic fixed income, low-cost strategies, domestic equity, foreign-invested Shariah and infrastructure to be the top strategies.

Behind pension funds in mandate issuances in 2020 were central banks and sovereign wealth funds, which accounted for 24.8% each. Insurers made up 11.9%.

SEA Institutional Addressable Assets by Institution Type. Source: Cerulli


Mark Wightman, EY

The Cerulli report noted that Malaysia had the highest percentage of state pension assets outsourced to external managers, at 15%. Wong says this is because pensions form the bulk of the country’s institutional investable assets – around 55.5% in 2020.

Employees Provident Fund (EPF), Malaysia’s largest pension fund, saw its assets under management grow 7.9% in 2020 to RM1.02 trillion ($251.48 billion).

“Swelling asset size of pensions in Malaysia also forced them to look beyond home markets, as well as explore alternative investments, for higher returns to match their liabilities,” Wong said. Lacking the expertise at home, Malaysian pension funds will seek global managers’ expertise for their global and alternatives strategies.

In February, EPF also launched a $600 million Sharia-compliant private equity separately managed account fund. It appointed three asset managers – BlackRock, HarbourVest Partners and Partners Group – to oversee it.

Shariah funds avoid investments into companies deriving most of their income from alcohol, pork products, pornography, gambling, military equipment or weapons. Proponents often draw parallels between Shariah and ESG investing, as both take into consideration the wider impact on society or the environment.

In Malaysia, Shariah assets accounted for 23.9% of the country’s total $34.7 billion assets under management in 2020, up from 22.1% the previous year. In Indonesia this grew from 10.2% to 13.3%.

Unlike in Malaysia, central banks have the highest share of investable assets out of all institutions. “In Singapore, sovereign wealth funds have higher investable assets than other institutions,” said Wong.

Alongside managing risks, meeting returns was pension funds' top priority for discussion with asset managers, followed by ESG and alternatives. A majority (61.9%) believe investment returns of 4% to 5% are realistic in light of the ongoing pandemic and low interest rate environment.

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