Operational Risk - Asian Institutions Sticking with Portfolio Strategies, but Questioning Use of External Managers

October 5th, 2009
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Contributed by: RiskCenter
By Joan Weber, Stamford, CT -- Asian institutions are joining their peers in other markets by refraining from making wholesale changes to their portfolio investment strategies in the wake of the global financial crisis. However, the results of Greenwich Associates’ 2009 Asian Investment Management Study reveal that institutions across Asia (excluding Japan) are reconsidering plans to outsource more of their assets to external investment managers after a year in which many managers fell far short of performance expectations.

Among Asian institutions, average fixed-income allocations increased to 68.6% of total assets in 2009 from 62.5% in 2008, while overall equity allocations dropped to 17.6% from 24.8%. Despite these shifts — which were driven largely by radical changes in portfolio asset values during the crisis — Asian institutions remain committed to previously determined strategies based on increasing allocations to equity and alternative asset classes, even if these changes are now likely to occur at a less rapid pace.

When asked what shifts they expect to make in their portfolios over the next three years, institutions report few year-to-year changes in their plans for fixed income and equities. Among the most important changes in institutions’ thinking have been the development of a new respect for cash and a new sense of caution that is causing institutions to move at a slower pace as they build allocations to alternative asset classes. In 2009, one in five institutions say they plan to increase cash allocations over the next three years, up from just 6% in 2008. Meanwhile, the share of institutions reporting plans to increase private equity allocations declined to 25% from 50%, the proportion planning increases to hedge funds dropped to 29% from 42% and the share planning increases to real estate allocations fell to 15% from 38%.

New Doubts About External Managers
Although Asian institutions remain confident in their overall investment strategies, many appear to have lost faith in their relatively small lists of external asset managers. In terms of raw size, Asia’s institutional asset base is huge: at more than $5 trillion, Asian assets actually exceed those held by institutions in continental Europe. Unlike continental Europe, however, the vast bulk of assets in Asia — approximately 87% — is managed internally by the region’s large institutions. Prior to the outbreak of the global financial crisis, Asia’s institutions were almost unanimous in their intent to increase the amount of assets outsourced to external managers. In 2008, 92% of Asian institutions said they planned to increase the share of their offshore assets managed externally and more than 45% said they planned to increase the share of onshore assets allocated to external managers. Fast-forward 12 months and those plans have largely evaporated. In 2009, only 15% of institutions say they plan to outsource additional offshore assets and 18% say they expect to increase the amount of onshore assets managed externally.

The reason for this change of heart is simple: In many cases, the absolute performance of internally managed portfolios was as good as or even better than that delivered by external managers through the crisis-filled months of the last year. “Due to their lack of equity exposure and the nature of their fixed-income holdings, internal portfolios held up relatively well during the market downturn,” says Greenwich Associates consultant Markus Ohlig. “By contrast, Asian institutions have been much more likely to outsource equity investments, and as a result, they were much more likely to be disappointed by the performance of their external managers.”

Internal Expansion
Institutions’ new skepticism about the value of outside managers is prompting many Asian institutions to develop plans to build up internal capabilities. Overall, 54% of institutions say they plan to expand their internal management capabilities by 2012. This planned buildup is being driven by smaller and mid-size institutions: 73% of institutions with between $250 million and $999 million in externally managed assets say they have plans to expand their internal investment capabilities. Institutions building out internal capabilities are most likely to concentrate on domestic asset classes, as well as overall portfolio allocation and risk management. “Asian institutions are not just planning to take passive investments in-house,” says Greenwich Associates consultant Abhi Shroff. “To the contrary, 68% of institutions are looking to generate alpha internally through active management.”

Greenwich Associates has a clear message for institutions planning to manage more of their assets internally, and specifically for those who will seek to create alpha through their own active management: Proceed with caution. “In Europe and other markets that we cover around the world, we have watched as time and again insurance companies and other institutions launched large expansions of their internal management capabilities, only to later realize that they had underestimated the challenges,” says Markus Ohlig.

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