Asia ex-Japan Institutions Look for Ways to Increase Returns, While Japan's Institutions Focus on Risk Management
SEOUL, South Korea & SMITHFIELD, R.I.--(BUSINESS WIRE)--While institutional investors in Asia are focused on managing the risks associated with above average market volatility and a low return environment, many also are looking for ways to better take advantage of market opportunities, according to new research by Pyramis Global Advisors®, a Fidelity Investments® company and leading global institutional multi-asset class investment manager.
The 2011 Pyramis Asian Pulse Poll, a survey of 95 institutional investors in Japan, South Korea, Taiwan, Hong Kong, Singapore and China, which cumulatively hold more than USD $1.1 trillion in assets, reveals that the top three concerns regarding their investment portfolios are risk management, volatility and a low return environment. Institutions surveyed included pension plans, insurance companies, central banks and sovereign wealth funds. Interestingly, institutions in Japan are more than twice as concerned about volatility as other Asian institutional investors, and nearly four times as concerned as those in Europe.
"There is little doubt the financial crisis of 2008-2009, and more recently the Eurozone sovereign debt issue, has forced institutional investors to identify better strategies for managing volatility, especially on the downside," said Young D. Chin, chief investment officer, Pyramis Global Advisors. "While risk management remains a top priority, the low return environment is driving more investors to also look for ways to enhance returns by deploying timelier, more dynamic asset allocation strategies that can exploit market dislocations."
Investment Strategies to Manage Volatility
According to the Pyramis survey, many institutions in Asia reveal they will consider uncorrelated or less volatile asset classes as a risk management technique for managing volatility. For Asia ex-Japan investors the top approach (61%) is diversifying into alternative asset classes, followed by using currency hedging techniques (55%). In contrast, the most likely approach amongst Japanese institutions is increasing fixed-income assets (61%), followed by adopting a liability-driven investing approach (42%). Only 16 percent of Japanese investors say they are likely to use currency hedging techniques.
Executing Timely Decisions is Key Challenge
The greatest challenge Asian institutional investors face in the investment decision-making process is moving fast enough to take advantage of opportunities. According to the Pyramis survey, 47 percent of Asia ex-Japan investors say their greatest challenge is executing timely asset allocation decisions, compared to 35 percent for Japanese pensions and 36 percent for those in Europe.
To help overcome this challenge, many Asian institutional investors are focused on improving the speed of their internal decision making and outsourcing more assets to external managers. Forty-seven percent of Asia ex-Japan investors say they are streamlining decision making through pre-approved opportunistic allocation, compared to 71 percent of Japanese investors. Additionally, 31 percent of Asia ex-Japan investors and 23 percent of Japanese investors are focused on better educating their investment committees.
"While there is a clear commitment to making internally-focused improvements to help execute more timely asset allocation decisions, there is also recognition amongst Asian institutional investors that external managers, particularly those that manage multi-asset class strategies, may be better positioned to quickly exploit opportunities to help generate returns as well as manage risk," said Chin.
Increased Allocation to Flexible Asset Classes Considered
According to the Pyramis survey, the top two changes Asia ex-Japan institutions are likely to make to their investment mix to increase returns are a greater use of: liquid alternatives (40%), such as long/short equity and global macro; and more aggressive sub-asset classes (40%), such as high yield and emerging markets equity. On the other hand, the top most likely changes amongst Japanese institutions are: adding more non-domestic assets to their investment mix (32%); increasing risk within an asset class (23%), for example, passive to active; and increasing use of liquid alternatives (23%).
Asian Pensions Increase Regional Investments, Reduce Developed Market Exposure
Institutional investors in Asia expect to increase their allocation to regional investments in the next one to two years, while reducing exposure to developed countries. According to the Pyramis survey, 39 percent of Asia ex-Japan institutions expect to increase their domestic equity exposure.
Conversely, 23 percent of Japanese institutions say they will decrease their domestic equity allocation. In addition, Asia ex-Japan and Japanese institutions expect to increase their allocations in Asian equity and fixed income, emerging markets equity and fixed income, and international/global equity and fixed income.
Although Asian institutions expect to shift their exposures across different regions and markets, the Pyramis survey also finds that more than 60 percent of Japanese institutions have no currency hedging policy for equities in place, compared to 32 percent of Asia ex-Japan institutions.
Asset Mix Goes Global Over Next Decade
Ten years from now institutional investors in Asia believe that investment portfolios will be more global as well as include heavier weightings in fixed income and alternatives. According to the Pyramis survey, Asia ex-Japan investors say the greatest change to asset allocation in 10 years will be a shift to more global investments (28%) -- both equity and fixed income. While Japanese institutions also see global allocations shifting (33%), they equally believe there will a significant shift towards fixed income and/or immunized strategies (33%).
"Through portfolio diversification, institutional investors in Asia can mitigate volatility by broadening asset class exposure," said Chin. "They are increasing allocations to strategies such as real estate and private equity with a view to enhancing returns while balancing those investments -- which often require extended time commitments -- with more unconstrained strategies like equity long/short and global macro, which provide more portfolio diversification and liquidity."
About the Survey
Pyramis conducted a survey of institutional investors during August and September 2011, including 95 institutional investors (39 private DB plans, 13 public DB plans, 39 insurance companies and 4 central bank/sovereign wealth funds) across six countries in Asia -- Japan, South Korea, Taiwan, Hong Kong, Singapore and China. Assets under management represented by respondents totaled more than $1.1 trillion USD. The survey was executed in association with the Financial Times. CEOs, COOs, CFOs, and CIOs responded to an online questionnaire or telephone inquiry1 . A report on the survey is available at www.pyramis.com.
About Pyramis Global Advisors
Pyramis Global Advisors, a Fidelity Investments company, delivers asset management products and services designed to meet the needs of institutional investors around the world. Pyramis is a multi-asset class manager with extensive experience managing investments for and serving the needs of some of the world's largest corporate and public defined benefit and defined contribution plans, endowments and foundations, insurance companies, and financial institutions. The firm offers traditional long-only and alternative equity, as well as fixed income and real estate debt and REIT investment strategies. As of June 30, 2011, assets under management totaled more than $176 billion USD. Headquartered in Smithfield, RI, USA, Pyramis offices are located in Boston, Toronto, Montreal, London, and Hong Kong.
Financial Times is not affiliated with Pyramis Global Advisors.
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1 The results of this survey may not be representative of all the institutional investors meeting the same criteria as those surveyed for this poll.
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