A new survey by Fidelity Investments shows Asian institutions will be looking more to alternative investments in the next couple of years to counteract market volatility and low returns.
The 2011 Pyramis Asian Pulse Poll was conducted by Pyramis Global Advisors, a Smithfield, Rhode Island-based Fidelity unit that manages $176 billion for institutions. The poll surveyed 95 institutional investors (pensions, insurers, sovereign wealth funds, central banks) in Japan, South Korea, Taiwan, Hong Kong, Singapore and China) which together hold more than US$1.1 trillion in assets.
According to the survey, 61% of Asia ex-Japan investors will diversify into alternatives as their top approach to managing volatility in the next one or two years, while 55% will employ currency hedging techniques. Among Japanese institutions, on the other hand, 61% preferred to increase fixed-income assets, while 42% planned to adopt a liability-driven investing approach. Only 16% of the Japanese investors say they are likely to use currency hedging techniques.
Asian institutional investors see the ability to move fast enough to take advantage of opportunities as the greatest challenge facing them in terms of investment decisions—47% of Asia ex-Japan investors say their greatest challenge is executing timely asset allocation decisions, compared to 35% for Japanese pensions and 36% for those in Europe.
To increase returns, 40% of Asia ex-Japan institutions are looking at greater use of liquid alternatives like long/short equity and global macro while 40% are considering more aggressive sub-asset classes like high-yield and emerging markets equity. As for Japanese institutions, 32% will add more non-domestic assets to their investment mix, while 32% will increase risk within an asset class (active to passive, for example) and 23% will increase use of liquid alternatives.
A full 39% of Asian ex-Japan institutions expect to increase their domestic equity exposure while reducing exposure to developed countries. In Japan, on the other hand, 23% of institutions plan to decrease their domestic equity allocations. 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.
“Through portfolio diversification, institutional investors in Asia can mitigate volatility by broadening asset class exposure,” said Chin. “They are increasing allocations to strategies such as real estate and private equity with a view to enhancing returns while balancing those investments—which often require extended time commitments—with more unconstrained strategies like equity long/short and global macro, which provide more portfolio diversification and liquidity.”