Year of the Pig reflection: Instos’ return expectations

AsianInvestor's next Year of the Pig reflection considers how ambitious institutional investors were when it came to their investment return expectations for the year.
Year of the Pig reflection: Instos’ return expectations

At the beginning of every Chinese New Year AsianInvestor makes 10 predictions relating to economic, geopolitical or investment issues that will affect how investors make their major decisions. Then, at the end of the year, we look back to how accurate these predictions were.  

Our third revisiting of our Year of the Pig predictions focuses on Asian institutional investors and whether they could match the sort of investment return targets they wanted to reach. 

Have asset owners set realistic investment targets for 2019? 

Answer: Yes (for that year, at least)

For several years now, many fund managers have been offering the gloomy prediction of "lower for longer", with interest rates set to remain low and investment returns to be similarly less impressive than five or 10 years ago. 

These concerns have combined with a major market reweighting in late 2018 to leave many asset owners feeling the pinch on their investment returns. Many large public pension funds such as Japan's Government Investment Pension Fund (GPIF) and Korea's National Pension Service (NPS) registered negative returns for the calendar year, and even sovereign wealth funds such as China Investment Corporation had difficult periods. 

We noted last year that asset owners in Japan typically target returns of around 3%, while pension funds in Korea aim a little higher, aiming to gain annual returns of 4% to 5% as they seek to build enough assets to meet the needs of their increasingly greying populations. These sort of levels have historically been fairly easy to meet, but following the issues of late 2018 and ongoing low interest rates they appeared more challenging this time last year. 

In the end, however, we predicted that they would still be able to attain them. And that optimism proved to be well founded, in large part because asset classes enjoyed a strong year. A set of rate cuts in the US helped to propel the performance of investment grade and junk debt alike, while the sustained strength of the US economy ensured stock prices also enjoyed strong performance over the year. Similarly, China's stock market roared back last year and offered some chunky investment returns. 

That helped asset owners to meet their investment needs for the year. While it is too early for full-calendar year figures to be released, at the end of the third quarter GPIF, for example, reported an investment return for the calendar year of well over 5%, while NPS's stood at 10.1% for the first 10 months of 2019. 

As we also noted, however, while asset owners looked set to beat their expectations for 2019, 2020 onwards could prove more testing. That looks the case today, with a combination of geopolitical challenges and little more room for rate cutting offering some sizeable challenges for asset performance this year. 

Previous Year of the Pig reflection articles: 

Will the US economy suffer a major downturn? 

Will ETF Connect between China and Hong Kong finally open?

How much will Asian asset owners add to alternatives?

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