Asian institutions are joining their peers in other markets by refraining from making wholesale changes to their portfolio investment strategies in the wake of the global financial crisis.
However, the results of Greenwich Associates’ 2009 Asian Investment Management Study reveal that institutions across Asia (excluding Japan) are reconsidering plans to outsource more of their assets to external investment managers after a year in which many managers fell far short of performance expectations.
Among Asian institutions, average fixed income allocations increased to 68.6 per cent of total assets in 2009 from 62.5 per cent in 2008, while overall equity allocations dropped to 17.6 per cent from 24.8 per cent. Despite these shifts – which were driven largely by radical changes in portfolio asset values during the crisis – Asian institutions remain committed to previously determined strategies based on increasing allocations to equity and alternative asset classes, even if these changes are now likely to occur at a less rapid pace.
When asked what shifts they expect to make in their portfolios over the next three years, institutions report few year-to-year changes in their plans for fixed income and equities. Among the most important changes in institutions’ thinking have been the development of a new respect for cash and a new sense of caution that is causing institutions to move at a slower pace as they build allocations to alternative asset classes.
In 2009, one in five institutions say they plan to increase cash allocations over the next three years, up from just six per cent in 2008. Meanwhile, the share of institutions reporting plans to increase private equity allocations declined to 25 per cent from 50 per cent, the proportion planning increases to hedge funds dropped to 29 per cent from 42 per cent and the share planning increases to real estate allocations fell to 15 per cent from 38 per cent.
Although Asian institutions remain confident in their overall investment strategies, many appear to have lost faith in their relatively small lists of external asset managers. In terms of raw size, Asia’s institutional asset base is huge: at more than USD5trn, Asian assets actually exceed those held by institutions in continental Europe. Unlike continental Europe, however, the vast bulk of assets in Asia – approximately 87 per cent – is managed internally by the region’s large institutions.
Prior to the outbreak of the global financial crisis, Asia’s institutions were almost unanimous in their intent to increase the amount of assets outsourced to external managers. In 2008, 92 per cent of Asian institutions said they planned to increase the share of their offshore assets managed externally and more than 45 per cent said they planned to increase the share of onshore assets allocated to external managers. Fast-forward 12 months and those plans have largely evaporated. In 2009, only 15 per cent of institutions say they plan to outsource additional offshore assets and 18 per cent say they expect to increase the amount of onshore assets managed externally.
"Due to their lack of equity exposure and the nature of their fixed-income holdings, internal portfolios held up relatively well during the market downturn," says Greenwich Associates consultant Markus Ohlig. "By contrast, Asian institutions have been much more likely to outsource equity investments, and as a result, they were much more likely to be disappointed by the performance of their external managers."
Institutions’ new skepticism about the value of outside managers is prompting many Asian institutions to develop plans to build up internal capabilities. Overall, 54 per cent of institutions say they plan to expand their internal management capabilities by 2012. This planned buildup is being driven by smaller and mid-size institutions: 73 per cent of institutions with between USD250m and USD999m in externally managed assets say they have plans to expand their internal investment capabilities. Institutions building out internal capabilities are most likely to concentrate on domestic asset classes, as well as overall portfolio allocation and risk management.
"Asian institutions are not just planning to take passive investments in-house," says Greenwich Associates consultant Abhi Shroff. "To the contrary, 68 per cent of institutions are looking to generate alpha internally through active management."
