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Risk appetite increasing for institutions in Asia

Investors moving back into market after seeing the cost of holding back

Institutional investors in Asia that were moving to the sidelines a year ago, citing high market valuations globally, are increasingly seeing the opportunity cost of not being in the market as the bigger risk for now.

The risk appetite of institutional investors in the region is "quite high at the moment," compared to a year ago, said Nicholas Hadow, chairman of the Investment Management Association of Singapore, at a Jan. 24 IMAS briefing on the industry outlook for 2018.

Rajeev de Mello, head of IMAS' development committee, at the same meeting, said institutional investors that built up cash positions last year amid concerns about central banks scaling back accommodation are finding it increasingly painful to maintain those low-risk, low-return allocations now.

The latest portfolio updates from high-profile asset owners in the region provide some support for that view.

On Feb. 1, Australia's Future Fund, which boosted its cash holdings to 20% or more of its portfolio in late 2015 through mid-2017 citing a dearth of attractive opportunities, announced results for the December quarter that showed the sovereign wealth fund beginning to reverse course.

In the three months ended Dec. 31, the Future Fund's cash weightings dropped 2.3 percentage points to 16.4%, following a 2.1 point drop for the prior quarter. At the same time, allocations to developed markets equities rose 1.8 points to 18.6% — the highest level in more than two years.

On Feb. 2, Japan's 162.7 trillion ($1.52 trillion) Government Pension Investment Fund likewise reported its cash holdings dropped to 7.1% at the end of December from a record 9.1% as of Sept. 30. Meanwhile, the fund's combined weighting to domestic and overseas equities topped 50% for the first time — closing the quarter at 51.13%, up from 48.4% at the end of September.

Whether the embrace of risk now by institutional investors in the region amounts to throwing caution to the winds is an open question.

One senior institutional sales executive with a big global money manager, who declined to be named, reported signs that investors are becoming a bit voracious. Institutional investors in the region who were tentatively allocating more to equities over the past year are making more aggressive allocations as the new year begins, he said.

David Neal, the Future Fund's CEO, in a briefing on the A$138,9 billion ($108.4 billion) sovereign wealth fund's latest results, described the fund's pickup in risk as "material but ... modest."

The fund "did increase risk" in response to improved economic conditions globally and earnings growth that has continued to exceed expectations, said Mr. Neal.

But even if "many of the risks we've been concerned about have somewhat moderated in the near term," the underlying structural issues of the past few years remain, he said, adding "we do still see vulnerabilities in the market environment."

The risk appetite of institutional investors in the Asia-Pacific region is clearly on the rise this year, but coming so soon on the heels of concerns about overvalued markets, many are striving to retain latitude to respond dynamically should markets become unfriendly, said Yoon Ng, director, Asia global market intelligence, Broadridge Financial Solutions.

Growing allocations to credit markets, for example, are moving beyond U.S. investment grade to include high-yield bonds and senior/floating-rate loans — relying on specialist managers to make the right market calls, Ms. Ng said.

Likewise, growing allocations to equities are favoring quantitative strategies — including low volatility but increasingly multifactor — over fundamental active strategies, she said.

Broadridge's proprietary data tracking institutional asset flows show Asia-Pacific institutional investors allocating more than $20 billion to credit strategies in the 12 months through Sept. 30. Ms. Ng said gross allocations on the equity side are very strong as well but they are being offset by other trends, such as insourcing.