Institutional investors in the Asia-Pacific region, a steady source of mandates for global private markets managers over the past decade, appear to be hitting the pause button against the backdrop of this year's capital markets pyrotechnics, market veterans say.
A long stretch of time which saw rock- bottom sovereign bond yields and narrow currency fluctuations facilitate a persistent flow of pension, insurance and sovereign wealth fund money into private overseas assets has given way to a more complex environment, with domestic assets back in the game of offering competitive returns.
South Korea's market is a case in point, with this year's dramatic rise in domestic rates leaving "risk-free paper" there offering higher yields in some cases than international illiquid asset classes, noted Simon England-Brammer, senior managing director and head of Europe, the Middle East and Africa and Asia-Pacific institutional, global client group with Nuveen LLC, the $1.1 trillion asset management arm of New York-based TIAA-CREF.
On a recent trip to Seoul, Mr. England-Brammer said he found insurers, a segment of the market keenly focused on asset-liability matching, making "significant shifts" in allocations back to domestic assets in the wake of hefty increases this year in both domestic yields, on the one hand, and the costs of hedging U.S. dollar exposures to won on the other.
The Korean won has weakened 13.9% vs. the dollar this year while the yield on the 10-year sovereign bond, coming off an Oct. 17 peak of 4.462%, stood at roughly 3.765% in trading Nov. 21, up more than 70% from the start of the year.
The increase in hedging costs has been dramatic enough to make "non-domestic investment considerably less attractive," Mr. England-Brammer said in an email.
By way of example, he pointed to the potential returns a South Korean investor could garner now from U.S. core/core-plus real estate.
A year ago, an insurer could have hoped for a 5% or 6% return from that asset class, but today — after a management fee of 50 basis points or so and hedging costs of 150 basis points or more — the net return would be closer to 2% or 3%, he said. That's less than the almost 4% yield on offer now from one-year government paper, up from roughly 1.4% a year ago.