Asset owners in the region's emerging markets are increasingly having to step outside their comfort zones as they hunt yield — but for many, their efforts to do so have hit a wall of red tape, as reported last week in the first of this two-part series.
Nevertheless, it is clear from recent conversations AsianInvestor has had with institutions in emerging markets across the region that while inertia abounds at some asset owners, others are blazing a trail.
Thailand’s Government Pension Fund (GPF) is one of the most strategically advanced investors in Southeast Asia. Despite the country's numerous political disruptions, ageing population and sluggish economic growth (GDP increased just 0.8% in 2014 and 2.8% in 2015), the fund has been broadening the range of investing tools it uses.
GPF has looked to improve returns by increasing its allocations to equities or credit and adding to its private markets allocations. The $22.4 billion asset owner is also moving to run more of its global equity exposure in-house. Some 45% of the portfolio is managed internally, with smart beta accounting for 5% to 6% of the global equity portfolio.
This comes after the board was given the green light in March 2016 to raise the offshore allocation limit to 30% from 25%. Additionally, GPF’s managers aim to raise the fund’s exposure to private markets to 14.5% from the current 11%.
Meahwhile, Thailand's biggest pension fund, the Social Security Office, is moving to implement a long-planned strategy to ramp up its foreign asset portfolio, as reported yesterday by AsianInvestor.
India’s Coal Mines Provident Fund (CMPFO) has also benefited from opening up its investment horizons. The fund reported an impressive 23% asset growth in AsianInvestor’s AI300 survey last year, in large part by boosting its stock allocation.
That proved smart, given that Indian share prices surged in 2015. While the 2016 numbers are not yet available, the fund opted to further increased its equity allocation as Indian stock valuations continued to rise. The fund did not respond to requests to provide specific statistics on the increase in its equity position.
BK Panda, CMPFO’s commissioner, told AsianInvestor the fund had raised its exposure to equities as part of the government’s move to free up capital to invest in local companies and projects. So far, CMPFO has awarded $1 billion mandates to local Indian asset managers SBI, Reliance and ICICI.
Unlike India’s largest retirement fund, the Employees’ Provident Fund Organisation (EPFO), CMPFO is not government-sponsored. EPFO has — as discussed in the first part of this article — delayed talks on asset diversification.
Lessons to learn
What lessons can be drawn from these examples? Perhaps the most important is the need to cut bureaucratic inertia.
If growing asset owner investment teams can convince their organisations to reduce sometimes stifling levels of oversight, they can better take advantage of the investment opportunities — and have less bureaucracy to battle against when seeking to use new investment tools.
Over the last two years, GPF has sought to simplify its investment decision-making process. Previously, the fund had three levels of approval — an internal investment committee, an external investment committee and the board — which meant it could take at least three months to make an investment. But it has shifted some complex decisions to two investment committees.
“We have cut the approval time to about six to eight weeks,” said Man Juttijudata, GPF's senior director of investment strategy. This meant the investment team could shift allocations faster.
The more streamlined process has become necessary as the fund's investments have grown more complex, not least in private markets. “It is quite difficult to make investment decisions piece by piece, so we have managed to streamline that process,” Man said.
Teerapong Ninvoraskul, assistant secretary general for private markets investment, added that the simpler governance structure and increased allocation to private markets should let the in-house team move more quickly, improving fund returns over the long term.
Other aspiring asset owners should take note. The ability of institutional investors to make investments quickly across asset classes and geographies offers them many more options and can help to mitigate their risks. At a time of flattening returns and ongoing geopolitical uncertainties, it makes a lot of sense to loosen the restraints on investment teams.
AsianInvestor is organising its first Thailand Global Investment Forum. For further details, please contact Terry Rayner on [email protected]