Elvin Yu, Head of Institutional Business, Greater China & Southeast Asia at Allianz Global Investors says 2013 may be a better year for asset owners.
“After Lehman in 2008 and the roller-coaster years of 2009-2010, mandates will only come up for review after three years and 2013 will be the next round of assessment. A lot of the investors have been taking a wait-and-see approach too, in the past 18 months, there has been too much macro news.
Have attitudes towards Asia changed? “We have been seeing more interest in Asian-related equities, fixed income, China exposure, QFII, dim sum bonds just to name a few. Some are more proactive and have started to make investments and some are still making enquiries, gathering more information and moving a little slower than their fellow pension funds, but overseas investment appetite for Asia has been very good. If you look at Asia, the economies are pretty strong and Asian currencies are appreciating, fundamentals are strong and the outlook is better. Has it become more expensive? Yes, if you compared with 12 months ago. But with super-low interest rates lasting another year or two, where else can you go?
Is Asia still being perceived as a risk market? “It is but at the same time, it gives you the premium. You do get some risk concerns, especially if you have the Asian financial crisis at the back of your mind, then you might still think that the Asian market is risky. From an allocation perspective, is Asia riskier than the other regions? We do see within fixed income, the investors can’t go into high-yield and Asian fixed income represents quite a nice allocation area for them. In particular, some markets with strong fundamentals such as Indonesia and the Philippines. In the longer term, we still believe that equity will provide better rewards but needless to say, volatility will remain.
Are Asian asset owners receptive to alternatives? “For a lot of the pension schemes, government and corporates, a lot of them can’t go into high-yield or alternatives mainly because of credit-rating requirement or risk-management. They can’t go into alternatives such as hedge funds or infrastructure which is illiquid, especially the Asian pensions, they don’t yet have the acceptance to super long-term investment as compared with their western counterparts. However on sovereign wealth funds, we are seeing more enquiries on infrastructure-related investment. Asia would be an easier story to accept, with strong demand for infrastructure networks – railway, airports and roads - especially in developing Asia. There will be projects coming up and there will be a need for funding and for infrastructure investment. For those who can take the ‘Asia risk’, they will go into that.
“In general, with the sovereign wealth funds, there are different ways to participate. They can do direct investment and take equity stakes, they can go through a portfolio such as a fund vehicle of a few projects and they could go through infrastructure debt. We do see a gap. There is a need for long-term projects and therefore the financing. Infrastructure debt is something that sovereign institutional investors can keep an eye on.
What are the opportunities for asset owners? “It’s fair to say the alternatives asset class will continue to gather more momentum - private equity, infrastructure debt or equity and real estate. Alternatives is no longer just hedge funds, it’s looking at real investment, if they don’t mind long-term illiquid investment, that momentum will continue. Sovereign wealth fund have big pools of money, they understand the risks and rewards and they are ready to go into it. For pension funds, it depends, because in different markets, the various schemes will face different liabilities and payouts and other requirements. For those who can afford such allocations, they can look into it.”
Is the herd investment mentality prevalent among Asian asset owners? “At the enquiry stage, yes, but really putting money in? I don’t think so. All these funds, they do know their risks and they do know their tolerance levels. They may look into an asset class because they’ve heard something about it and there’s more noise over the subject. I don’t think they will collectively rush into it but it’s good to see investors seeking more information. Investors will still be very selective.
What’s ahead in 2013? We’re starting to see investors asking about European equities. This year, hopefully, there won’t be any downside surprise. But at the end of the day, for European equities, stock-picking would matter. There may be some changes coming up in terms of asset allocations, though not drastic. We do expect that with markets stabilising, the asset allocator would start to look into riskier assets again. We expect more allocations into equity relatively more than fixed income but we don’t expect drastic changes.