March 20, 2017

Faced with volatility, greater risks and still-low yields, Asian institutional investors are raising their exposure to higher-risk assets in pursuit of better returns, according to an international survey of institutional investors published by Natixis Global Asset Management.

Natixis Global Asset Management surveyed 500 institutional managers, of which 62 are based in Asia. These institutional managers were drawn from public and corporate pensions, foundations, endowments, insurance funds and sovereign wealth funds in North America, Latin America, the United Kingdom, Continental Europe, Asia and the Middle East. Collectively, they manage $15.5 trillion in assets.

The findings provide insight into how institutional investors, largely considered to be the world’s largest, smartest investors, are using risk to their advantage. Meanwhile, 77% of Asian institutional investors (versus 75% globally) think individual investors might be taking on too much risk in pursuit of yield.

Sixty-two percent of both global and Asian institutional managers feel they can handle near-term market risk despite greater market volatility, which they say poses the biggest risk to their performance. Their top organisational concern, however, is low yield. Given the prospect for greater volatility and persistence of low interest rates, a higher proportion of Asian institutional investors (78% versus 69% globally) said they need to replace traditional diversification and portfolio construction techniques with new approaches to meet their performance goals.

In their efforts to manage the risks, they believe the more effective techniques include risk budgeting (82% versus 87% globally), diversifying holdings across sectors (81% versus 86% globally), and currency hedging, (77% versus 75% globally). The survey revealed that Asian institutional investors are more conservative as they are less keen on increasing use of alternative investments (68%) compared to their global counterparts (76%).

“While risk factors change over time, the challenge for institutional investor remains to deliver long-term results while navigating short-term market pressures,” said Fabrice Chemouny, Executive Vice President and Global Head of Institutional Sales of Natixis Global Asset Management – International Distribution. “Given their mandates, avoiding risk is not an option for institutional investors. They have to beat the odds or change the game, and they are doing so by balancing risks and embracing alternatives to traditional portfolio construction, but always with an eye on their long-term objectives”.

Asian institutional investors confident in achieving returns

In examining their goals, majority of Asian investors believe their return expectations are achievable, although their expressed confidence may not be as strong as compared to their global counterparts (63% versus 70% globally). Nevertheless, a smaller proportion of Asian investors expect to decrease return assumptions in the next 12 months (37% versus 50% globally), even though they are more likely to believe alpha is becoming harder to come by as markets become more efficient (86% versus 75% globally).

The survey also found:

  • Sixty-seven percent of Asian institutional investors think private equity provides higher risk-adjusted returns than traditional asset classes, and more than half (51%) believe private equity provides better diversification than traditional stocks.
  • Seventy-four percent think private debt provides higher risk-adjusted returns than traditional bond investments. Asian investors play a greater role in funding infrastructure projects compared to their global peers (81% versus 76% globally). Many also say they are likely to consider increasing the use of direct lending (47% versus 44% globally) and special situations (32% versus 34% globally).
  • Asian institutional investors are expected to allocate less to real estate compared to their global peers, both now (5.4% vs. 7.4% globally) and in the future (4.4% versus. 6.3% globally).
  • Asian institutional investors have a higher allocation to cash (6.1% versus 5.1% globally), but their proclivity to cash is expected to drop significantly in 2017, leaving them with a smaller allocation compared to institutions globally (3.8% versus 4.5% globally)

Active management is better suited to generating risk-adjusted returns

Seventy-one percent of Asian institutional investors (versus 73% globally) believe today’s markets are more favorable to active managers and a higher number of institutional investors are willing to pay higher fees for potential outperformance compared to their global peers (82% versus 78% globally). 
Asked to compare the relative strengths of active and passive investments, 89% of Asian institutional investors (versus 86% globally) say active is better suited to generating alpha, for accessing emerging market opportunities (85% versus 76% globally), and for ESG investing (77% versus 75% globally). 
While institutional investors see the value of passive investments for specific objectives, they see potential problems for individual investors who have come to rely heavily on indexing. For 75% of institutional investors agree that individuals are not fully aware of the risks of indexing which may conduct them to a false sense of security about indexing.