Sovereign wealth funds move outside for specialist investments

Growing allocations to alternatives and multiasset strategies have left the sovereign wealth funds and national pension plans that dominate Asia's institutional investor landscape relying more on external money managers to manage their portfolios.

Even as those bulge-bracket investors add research and investment offices around the globe, and build up internal capabilities to manage their portfolios more tactically, data from their latest annual reports show external managers overseeing bigger chunks of their portfolios now than in previous years.

For example:

• China Investment Corp. reported external managers overseeing 67.2% of the Beijing-based fund's more than US$200 billion international portfolio as of Dec. 31, up from 63.8% the year before.


• Korea's National Pension Service said 33.8% of its 442 trillion won (US$436 billion) investment portfolio was outsourced to external managers as of Dec. 31, up from 30.9% the year before; and


• Taiwan's US$20.1 billion defined benefit Labor Retirement Fund had external managers handling 43% of its portfolio as of Dec. 31, 2013, up from 34% a year earlier.

Miserably low yields on sovereign debt now are buoying demand in the region for alternative investments, even as uncertainty about what the end of quantitative easing will mean for markets is prompting demand for multiasset strategies, money managers say.

In an interview, Juan Delgado-Moreira, Hong Kong-based managing director and head of international for private markets investment firm Hamilton Lane Advisors LLC, said the hunt for yield now is helping boost allocations to alternatives managers from even the most sophisticated sovereign wealth funds in the region.

He declined to name clients but in July, a spokeswoman for Seoul-based NPS said the Korean pension fund will invest 400 billion won in a private equity co-investment fund managed by Hamilton Lane.

NPS' alternatives assets totaled 41.7 trillion won as of May 30, 2014, accounting for 9.5% of its portfolio, up from 8.4% at the end of 2012.

Even executives at GIC Private Ltd. — the Singapore sovereign wealth fund widely considered to be among the most capable at managing its own investments — said earlier this year they might boost allocations in coming years to alternatives managers with “niche expertise.”

The fund's 2012 annual report pegged the portion of assets overseen by external managers at “up to 20%.” A GIC spokeswoman declined to provide a current figure but the Sovereign Wealth Fund Institute estimates GIC's portfolio is now US$320 billion.

GIC's latest annual report, released Aug. 2, noted the fund has “over 100 active relationships with PE fund managers,” as well as more than 100 private equity investments made either directly or as co-investments alongside external managers.

Major investors looking to boost alternatives allocations now include Japan's US$1.25 trillion Government Pension Investment Fund, Korea's NPS and Korea Investment Corp., Taiwan's US$80.1 billion Bureau of Labor Funds and Thailand's US$22 billion Government Pension Fund.

Hamilton Lane's Mr. Delgado-Moreira said with alternative allocations in the region well below those of most leading institutional investors in North America and Europe, interest in boosting exposure to segments such as private equity, infrastructure and real estate has continued to pick up.

If that demand is providing grist for the mills of alternatives managers, growing allocations to multiasset-class strategies over the past year have left money managers better known for long-only strategies moving to build their asset allocation capabilities in Asia.

Institutional investor demand for multiasset-class solutions has been the strongest of any market segment over the past year and by some estimates could surge by more than 30% a year in coming years, noted Yu-Ming Wang, deputy president, global head of investment and chief investment officer at Nikko Asset Management, Tokyo.

Mercer Investments, in an April 30 announcement regarding the consulting giant's search activity on behalf of institutional clients in 2013, said international multiasset strategies garnered the biggest chunk of the US$3.5 billion Mercer placed for Asia-based clients during the year.

For many investors anticipating a low-return environment, multiasset is a more comfortable choice than hedge funds when looking for unconstrained strategies where manager skill can add value, said Alvin Tay, Singapore-based managing director of investment consulting firm Cambridge Associates Asia Pte. Ltd. The lower beta of hedge funds makes them a preferred option for Cambridge, but clients seeking better liquidity have helped buoy demand for multiasset, he said.

At an Aug. 19 news conference in Singapore, Mr. Wang announced Nikko was pulling together investment professionals from its offices in Tokyo, New York and Sydney to field an 18-member multiasset team in Singapore.

The team — led by Al Clark, who joined Nikko earlier this year as global head of multiasset from Schroder Asset Management (Singapore) — will oversee a US$24 billion book of business.

A day earlier, Manulife Asset Management announced it had snared Peter Warnes as the first international head of the firm's portfolio solutions group, from J.P. Morgan Asset Management in Hong Kong.

In an interview, Stefan Lecher, a Hong Kong-based managing director and global head strategist for UBS Global Asset Management (Hong Kong) Ltd.'s global investment solutions group, said relatively strong demand for multiasset strategies in markets such as Australia, Japan and Korea led him to relocate to Hong Kong a year ago after nine years in Zurich.

UBS' multiasset business on behalf of institutional clients in Asia has doubled over the past two years, and could do so again over the next three to five years as investors anticipating the end of the quantitative easing market cycle come to grips with how to manage their beta exposures across fixed income, equities, commodities and alternatives, said Mr. Lecher. He would not elaborate.

The promise of markets such as China, where insurers only recently won regulatory approval to invest 15% of their portfolios abroad, was another factor pushing UBS to “build up its team and skill set” to serve institutional clients in Asia, Mr. Lecher said. Similar to the U.S. and Europe, those clients will be looking for partnerships that include a significant element of knowledge transfer, he said.

If uncertainty about the economic outlook has left institutional investors open to tapping the asset allocation expertise of external money managers, a number of Asia's biggest remain intent on building those capabilities internally.

In its latest annual report, released Aug. 15 but since withdrawn for further consideration, Korea Investment Corp., Seoul, staked out some of the most aggressive ground on that score, saying it was working to “fast track” its investment decision-making process to be able to time the market when necessary. “We will also build up a risk management system that allows for pre-emptive measures by identifying change in markets with insight and accuracy,” the report added.

Interest in multiasset strategies is clearly picking up in Asia, but demand coming from insurance companies and midsize pension funds and endowments could prove more reliable than demand from regional heavyweights with large internal teams, said Peter Ryan-Kane, a consultant and head of portfolio advisory for the Asia-Pacific region, ex-Japan and Australia, with Towers Watson Investment Services Hong Kong

For the biggest investors, working with external multiasset managers could simply be part of their learning curve, he said.

UBS' Mr. Lecher is more sanguine: “I'm absolutely happy for my brain to be picked. It's part of the value proposition.

“And to be frank, it's a two-way street,” he added, noting that what UBS learns from sophisticated institutional clients in North America, Europe and Asia leaves the firm better positioned to keep adding value in a business that is always evolving.