Asian investors remaining cautious

Institutional investors in the Asia-Pacific region aren't trimming their sails yet to catch the tailwind global equity markets have enjoyed since Donald J. Trump's victory in the U.S. presidential vote.

In the year leading up to the Nov. 8 presidential election, rising U.S. equity valuations and unattractive valuations in fixed-income markets had Asia-Pacific clients of Boston-based investment consultant Cambridge Associates LLC boosting their cash allocations, and that caution has persisted, said Alvin Tay, managing director of Singapore-based Cambridge Associates Asia Pte. Ltd.

Still, the opportunity costs of taking risk off the table have risen since Mr. Trump's victory, with global markets seemingly anticipating a pickup in growth resulting from the president-elect's promises to kick fiscal policy into high gear and slash regulations.

The U.S. Dow Jones industrial average was up 8.15% as of Dec. 9 since the election at a record high of 19,756.85 and some of that index's Asia-Pacific counterparts have done as well or better. Japan's TOPIX index of stocks listed on the first section of the Tokyo Stock Exchange closed Dec. 9 at 1,525.36, up 17% over the past month, while Australia's ASX index ended up 7.8% at 5,560.60.

Bond prices, meanwhile, have fallen as yields rise to reflect more bullish global growth expectations. Since the election, the Barclays Global Aggregate bond index has lost roughly 1.7%.

“In today's climate” — with considerable uncertainty about what recent political events will mean for capital markets — “we're not seeing people rush to put money (parked in cash) back into equity markets or fixed-income markets,” said Mr. Tay. If anything, the trend toward greater diversification away from long-only stocks and bonds is continuing, he said.

After seven years of rallies for global stocks and bonds, big institutional investors are taking stock of their portfolio management approaches and opting to become more defensive, agreed Peter Ryan-Kane, Hong Kong-based head of portfolio advisory for the Asia-Pacific region with Willis Towers Watson PLC's investment consulting business.

The short-term bounce global equity markets have experienced in the weeks following the election is unlikely to derail that trend, he said. Based on its view of the balance of risks facing investors now, Willis Towers Watson is calling on clients to reposition their fixed-income exposures by moving out of global bonds in favor of a mix of Asian bonds and cash, said Mr. Ryan-Kane.

Among Asia-Pacific investors, Australia's Future Fund has led the way in trimming its exposure to risk assets over the past 18 to 24 months, lifting its cash allocation to more than 20% from 12.8% at the end of 2014. For the quarter ended Sept. 30, the fund reported 22.1% of its A$124 billion ($95.1 billion) investment portfolio parked in cash.

The strength of global markets following Mr. Trump's victory won't prompt any immediate changes when it comes to Future Fund's appetite for risk, said Stephen Gilmore, the fund's Melbourne-based chief investment strategist, in a Dec. 7 interview.

Mr. Gilmore said while he had to be “open to the possibility that there's a more constructive growth narrative” going forward, a wait-and-see stance makes sense for now. Lower taxes and a reduced regulatory burden in the U.S. could plausibly boost growth and corporate earnings, but an alternative scenario of protectionist moves coupled with the ripple effects of a stronger dollar and higher U.S. interest rates is equally plausible, he noted.

The “range of uncertainty has increased,” but for Future Fund the balance of risks remains “biased to the downside,” added Mr. Gilmore.

Meanwhile, the biggest pension fund in the world — Japan's ¥132.1 trillion ($1.17 trillion) Government Pension Investment Fund — also reported a higher cash weighting for its latest quarter ahead of the U.S. election.

The GPIF reports quarterly asset allocation data for the combined assets of its investment portfolio and the Ministry of Health, Labor & Welfare's Pension Special Account, used to make benefits payments to pensioners every other month.

For the quarter ended Sept. 30, the GPIF reported a record 8.75% of that combined pool of ¥140.5 trillion in cash — with roughly two-thirds in the Pension Special Account and one-third in GPIF's investment portfolio, effectively tripling the GPIF's cash weighting to 3% from 1% at the March 31 close of the latest fiscal year.

In an e-mail, Shinichiro Mori, deputy director-general of the fund's investment strategy department, declined to call the latest quarter's rise in cash holdings a deliberate move to take risk off the table, noting the money that had to be set aside for benefit outlays in October was a big factor.

Still, the market environment was a factor in determining GPIF's allocations “within the allowances” set by the policy asset mix for the fund's asset classes — domestic and foreign equities and bonds — with the fund's cash allocation the outcome of those four allocation decisions, he noted.

For the quarter ended Sept. 30, the GPIF reported a 1.8% investment return, its first in three quarters, with gains on its holdings of domestic and international stocks more than offsetting losses on its holdings of local and overseas bonds.

Still, there was little evidence the GPIF moved during the quarter to rebalance domestic and overseas equities allocations which remained below the fund's policy asset mix targets of 25% each.

As of Sept. 30, the fund's allocations to domestic equities edged up to 21.59% from 21.06% at the close of the prior quarter, helped by a 7% advance by the TOPIX index. GPIF's allocation to overseas equities, meanwhile, edged lower to 21% from 21.31%, even as the fund's composite benchmark for international stocks was rising roughly 5%.