A small number of national champions might continue to dominate Asia's institutional investor landscape as asset totals swell over the coming decade, but politics and portfolio management considerations might head off the emergence of more trillion-dollar behemoths like Japan's Government Pension Investment Fund, observers argue.
In a number of Asia-Pacific markets, “having all the retirement savings concentrated in one particular entity” is already creating size issues, said Garry Hawker, a Singapore-based partner and director of growth markets consulting with Mercer.
Industry watchers point to markets such as Korea and Malaysia, where mandatory contributions to the Seoul-based National Pension Service, with $365 billion in assets, and the Kuala Lumpur-based Employees Provident Fund, with $165 billion, have left the growth of retirement assets far outpacing the growth of those country's respective capital markets.
NPS officials for years, and EPF officials more recently, have noted that the scale of their equity investments in locally listed firms has become problematic, leading both organizations to allocate more money overseas in recent years.
Meanwhile, the potential investment headaches that come with size are suggested by an ongoing study this year by the region's biggest fund — Japan's $1.2 trillion Government Pension Investment Fund — of new investment strategies to diversify a portfolio which has remained dominated by Japanese government bonds.
For example, money managers say the GPIF is looking seriously at making its first allocations to private equity, but a 5% target would require putting $60 billion to work — 10 times the size of the record pan-Asian private equity fund New York-based Kohlberg Kravis Roberts & Co. announced it had closed on July 9.
When these institutional pools in Asia become very large relative to the size of the market in which they're investing, it becomes harder for them to allocate to niche asset classes, and ultimately leads to more passive investments, said Markus Ohlig, Singapore-based managing director, Asia-Pacific, with Greenwich Associates.
Other pension funds and sovereign wealth pools — including Korea's NPS, which garners monthly contributions of $2 billion, or China's $180 billion National Council for Social Security Fund, which gains assets though contributions from three sources as well as investment returns — could find themselves approaching the $1 trillion threshold within a decade or so.
But market watchers say the drawbacks of size appear to be on the minds of policymakers in the region.
The “key team risk” that comes when fairly big assets are being run by small teams could lead decision-makers to follow the example of Sweden, which broke up its national pension buffer scheme into a number of smaller funds more than a decade ago to make investment of those assets more manageable, noted Bo Kratz, Northern Trust Corp.'s Hong Kong-based managing director for asset management in the Asia-Pacific region.
For some, the issue is one of political perceptions. Stuart Leckie, the chairman of Hong Kong-based pension consultant Stirling Finance, said policymakers in China, anxious to avoid the specter of a huge, conspicuous NCSSF making high-profile investments around the globe, might instead consider creating an NCSSF-2 or a China Investment Corp.-2.
Mr. Kratz conceded the political argument has merit, but said the impracticalities of putting $1 trillion to work is equally urgent, if not more so. n