The 2011 Pyramis Asian Pulse Poll reveals that the top three concerns regarding their investment portfolios are risk management, volatility, and a low return environment. Institutions in Japan are more than twice as concerned about volatility as other Asian institutional investors, and nearly four times as concerned as those in Europe.
According to the Pyramis survey, many institutions in Asia reveal they will consider uncorrelated or less volatile asset classes as a risk management technique for managing volatility. For Asia, ex-Japan investors the top approach (61%) is diversifying into alternative asset classes, followed by using currency hedging techniques (55%). In contrast, the most likely approach amongst Japanese institutions is increasing fixed-income assets (61%), followed by adopting a liability-driven investing approach (42%). Only 16% of Japanese investors say they are likely to use currency hedging techniques.
The greatest challenge Asian institutional investors face in the investment decision-making process is moving fast enough to take advantage of opportunities. According to the Pyramis survey, 47% of Asia ex-Japan investors say their greatest challenge is executing timely asset allocation decisions, compared to 35% for Japanese pensions and 36 percent for those in Europe.To help overcome this challenge, many Asian institutional investors are focused on improving the speed of their internal decision making and outsourcing more assets to external managers. Forty-seven percent of Asia ex-Japan investors say they are streamlining decision making through pre-approved opportunistic allocation, compared to 71% of Japanese investors. Additionally, 31% of Asia ex-Japan investors and 23% of Japanese investors are focused on better educating their investment committees.
Investing to Increase Returns
According to the Pyramis survey, the top two changes Asia ex-Japan institutions are likely to make to their investment mix to increase returns are a greater use of: liquid alternatives (40%), such as long/short equity and global macro; and more aggressive sub-asset classes (40%), such as high yield and emerging markets equity. On the other hand, the top most likely changes amongst Japanese institutions are: adding more non-domestic assets to their investment mix (32%); increasing risk within an asset class (23%), for example, passive to active; and increasing use of liquid alternatives (23%).
Institutional investors in Asia expect to increase their allocation to regional investments in the next one to two years, while reducing exposure to developed countries. According to the Pyramis survey, 39% of Asia ex-Japan institutions expect to increase their domestic equity exposure.
Conversely, 23% of Japanese institutions say they will decrease their domestic equity allocation. In addition, Asia ex-Japan and Japanese institutions expect to increase their allocations in Asian equity and fixed income, emerging markets equity and fixed income, and international/global equity and fixed income.
Although Asian institutions expect to shift their exposures across different regions and markets, the Pyramis survey also finds that more than 60% of Japanese institutions have no currency hedging policy for equities in place, compared to 32% of Asia ex-Japan institutions.
Institutional investors in Asia believe that 10 years from now investment portfolios will be more global as well as include heavier weightings in fixed income and alternatives. According to the Pyramis survey, Asia ex-Japan investors say the greatest change to asset allocation in 10 years will be a shift to more global investments (28%) — both equity and fixed income. While Japanese institutions also see global allocations shifting (33%), they equally believe there will a significant shift towards fixed income and/or immunized strategies (33%).
Pyramis conducted a survey of institutional investors during August and September 2011, including 95 institutional investors (39 private DB plans, 13 public DB plans, 39 insurance companies, and four central bank/sovereign wealth funds) across six countries in Asia — Japan, South Korea, Taiwan, Hong Kong, Singapore. and China. Assets under management represented by respondents totaled more than $1.1 trillion. The survey was executed in association with the Financial Times. CEOs, COOs, CFOs, and, CIOs responded to an online questionnaire or telephone inquiry.A report on the survey is available at http://www.pyramis.com.