Asian asset owners facing record losses in quarter

Asia's largest pension and retirement plans are facing their fiercest — and potentially lengthiest — risk-off market in more than a decade, with more to lose now due to sharp increases in allocations to equities and other risk assets over that period.

The short-term bill for that growing risk appetite is likely to come due in the current quarter as one country after another shuts down chunks of its economy to contain the coronavirus that originated in China in late 2019 and quickly spread around the globe.

Among big retirement funds in the region, equity allocations have surged to 50% for Japan's ¥169 trillion ($1.61 trillion) Government Pension Investment Fund, Tokyo, from 20% in 2010; to 40.6% for South Korea's 736.7 trillion won ($619.2 billion) National Pension Service, Jeonju, up from 23.1%; and to 39% for Malaysia's 924.75 billion ringgit ($220.7 billion) Employees Provident Fund, Kuala Lumpur, an increase from 27% a decade ago.

Other pension markets in the region — including China, India, Thailand and the Philippines — have either raised their ceilings for equity investments or are considering it.

The bull market for stocks coming out of the global financial crisis since 2009 provided a tailwind for that move away from portfolios dominated by government bonds.

With the worldwide sell-off in equities since late February — prompted by the global spread of the coronavirus and the economic lockdowns countries are instituting to contain it — that gain in equity allocations is translating into pain now, at least for the short term.

As of March 20, the Dow Jones Industrial Average, Japan's Nikkei 225 stock index, the U.K.'s FTSE 100 benchmark and the broader MSCI-All Country World index were all down roughly 30% from the start of 2020.

Year to date through March 20, GPIF's equity allocations are down by an estimated ¥20 trillion or more, or about $190 billion — a 12% drop for the overall portfolio.

Norihiro Takahashi, GPIF's president, and Hiromichi Mizuno, the fund's chief investment officer, could not be reached for comment.

The equity allocations of South Korea's NPS, Asia's second-largest retirement fund, have lost an estimated 75 trillion won, or roughly $62.5 billion, for a 10% overall decline.

Market volatility related to the coronavirus outbreak resulted in an NZ$8.9 billion ($5.6 billion), or 19.5%, drop in value for the New Zealand Super Fund, Auckland, the sovereign wealth fund said in a news release March 20. The fund's portfolio fell to NZ$37.8 billion at the close of trading March 17, from a record NZ$46.7 billion as of Dec. 31. The fund had a more than 70% allocation to listed equities as of the June 30 close of its latest fiscal year.

Sharp declines in markets like the current one are the price investors that rely on "growth assets to generate higher long-term returns" have to pay, said Matt Whineray, New Zealand Super's CEO, in the release. With the fund facing no substantial withdrawals until the 2050s, New Zealand Super is well-placed to ride out the storm, he added.

Just as important, Mr. Whineray said, are the "active, contrarian investment strategies" the fund deploys to benefit from the opportunities that will be offered up by the most volatile market environment since the 2008 global financial crisis.

In an email, Mr. Whineray pointed to the fund's "strategic tilting" program, which uses derivatives to increase or decrease exposure to equity markets, bond markets or currencies that stray from their underlying long-term fundamental market value based "on our belief in mean reversion."

New Zealand Super has taken on more active risk through its strategic tilting program as markets have declined, a spokesman confirmed.

Asset owners in the region that have reduced equity exposure in favor of boosting allocations to alternative asset classes say they're likewise grappling with the opportunities and challenges being thrown up by the coronavirus outbreak.

Allocations of only 12% to listed equities and more than 50% to alternatives have made the current global market sell-off easier to bear but still challenging for the 14.3 trillion won ($11.2 billion) Seoul-based Public Officials Benefit Association, CIO Dong Hun Jang said.

For example, all of his planned due diligence trips for the first half of the year to destinations such as Singapore, London and Los Angeles have been called off, a hurdle that could find his fund opting to rely on "re-upping" with general partners POBA already knows well to a greater extent than usual, Mr. Jang said.

Meanwhile, the existential threats small- and medium-size companies around the globe are facing as leaders of country after country lock down their markets to contain the spread of the virus have prompted POBA to review how well its private debt allocations are holding up. While some energy-related companies are now struggling, for the most part POBA's general partners appear confident they can navigate through the market's current squalls, Mr. Jang said.

Finally, the record level of cash the fund raised earlier in the year — on the assumption that 2019's extraordinary gains for risk assets were unlikely to be repeated this year — has left POBA with dry powder to hunt for bargains. Mr. Jang declined to provide specific figures for his fund's cash holdings but he said the recent hit to listed global real estate investment trusts and listed global infrastructure has made those segments an area of interest for POBA now.