The ranks of Asia-Pacific asset owners looking to smart beta equity strategies to play key roles in their investment portfolios continue to expand this year, on the back of research conducted in tandem with key money management partners.
That steady progress suggests that, despite the fact that a number of big institutional investors in Asia were only established over the past decade or so, they haven't been laggards when it comes to exploring the way smart beta strategies can add value in their portfolios, said Chin Ping Chia, Hong Kong-based head of Asia-Pacific research with benchmark index heavyweight MSCI Inc.
The 20 largest institutional pools of capital in Asia are either allocating to smart beta or moving to do so, and “using the likes of ourselves to help them with the research,” said Kevin Hardy, who served as managing director of New York-based BlackRock Inc.'s Asia-Pacific beta strategy business before becoming head of the firm's Singapore office three years ago.
On Aug. 22, the NZ$30 billion ($21.8 billion) New Zealand Superannuation Fund awarded its first factor-based allocations of NZ$300 million each for low volatility and value strategies to Chicago-based Northern Trust Asset Management.
Later that day, First State Super, a Sydney-based fund with roughly A$75 billion ($57.2 billion) in superannuation and retirement assets, hired New York-based Neuberger Berman LLC to manage an A$1.6 billion multifactor emerging markets equity mandate focused on quality and value.
Those announcements came on the heels of other smart beta flows in the region this year, including roughly $14 billion, combined, in additional allocations by Japan's Government Pension Investment Fund, Tokyo, to an S&P Global Intrinsic Value index strategy run by Goldman Sachs Asset Management and a Research Affiliates Fundamental index strategy managed by Nomura Asset Management, and more than $2.1 billion in allocations by Taiwan's $109 billion Bureau of Labor Funds, Taipei.
John McCareins, Hong Kong-based managing director Asia-Pacific with Northern Trust Asset Management, said in an interview that New Zealand Super's Aug. 22 announcement followed nine months of research collaboration focused on how factor-based investing could fit into the Auckland-based fund's portfolio.
It wasn't, “here's our product, please buy it,” but rather “what are you trying to achieve and how can we help you achieve that in the most efficient manner possible?” said Mr. McCareins.
Lucas Rooney, joint managing director of Melbourne-based Neuberger Berman Australia, described a similar process in the lead up to First State Super's factor-based allocation, with his firm's New York-based quantitative research team and the asset owner's internal investment team embarking on a nine-month project examining “the efficacy of a range of factors as investment signals in emerging markets equities.”
BlackRock's Mr. Hardy said in a region with fewer, bigger pools of institutional capital, factor-based strategies can be an important tool for diversifying investments when size makes it difficult for asset owners to get access to the top managers they want.
That was the case with First State Super.
Richard Brandweiner, First State Super's outgoing chief investment officer, said in an interview that his investment team was looking to boost allocations to emerging markets equities after years of underperformance left valuations there looking relatively attractive, but the fund's “extremely high-quality” active manager — whom he declined to name — was closed to new cash flows.
First State Super's most recent annual report, for the fiscal year ended June 2015, showed Colonial First State as the fund's only emerging markets manager. A spokeswoman for Colonial First State confirmed that her firm's emerging markets equity strategy remains closed.
Mr. Brandweiner said FSS' active manager had accounted for a little more than half of the neutral 10.5% emerging market equity exposure in the fund's MSCI All-Country World index benchmark, with the rest coming from FSS' global equity managers.
“We couldn't get enough exposure to emerging markets to be meaningful” in the context of a fast-growing portfolio, and were very keen to do so “in an effective way, with plenty of capacity,” said Mr. Brandweiner. That led to a decision to terminate an active manager “we had enormous respect for,” he said.
Neuberger Berman's A$1.6 billion mandate comes to about 12% of FSS' global equities exposure, effectively lifting the overall weight of emerging market equities to 17%, he said. At the end of the day, “we've been building out our portfolio and our processes around flexibility,” and being able to access different market exposures through a smart beta approach provides that flexibility while “raising the bar for the quality of alpha that we're seeking from our active managers,” he said.
With smart beta effectively a middle ground between passive and active strategies, asset owners in Asia have funded factor-based allocations by shifting money out of passive and active exposures alike, said BlackRock's Mr. Hardy.
New Zealand Super, which only shifts money away from the fund's passive 80% equity, 20% fixed income reference portfolio when its investment team has a high degree of confidence of adding value, is funding its NZ$600 million allocation to factor-based strategies from the passive side — its roughly NZ$3.5 billion allocation to market-cap-weighted global equity indexes managed, again, by Northern Trust.
Catherine Etheredge, NZ Super spokeswoman, said the fund considers those factor-based strategies to be a value-add allocation, and consequently to be judged by how much their returns can exceed the fund's passive global equity benchmark over the long term.