winLong-term institutional investors, including pension funds, have been urged to examine their roles and the various financial theories and tools that they utilise, as hedging and quarterly reporting are making them pro-cyclical,  says Andrew Sheng, president of Hong Kong think-tank Fung Global Institute.

“The real problem of the finance world today is that we are abandoning the Gold Standard because the Gold Standard was the ultimate hard budget constraint. No gold, no credit, no consumption. But we don’t like that, that’s too painful. We want to be able to print money.”

As the Asia region ages, money will be spent on healthcare and medical support, increasing the need for more income, says Sheng, who is also chief adviser to the China Banking Regulatory Commission and former chairman of Hong Kong’s SFC.

“The whole world which is basically thriving on financial repression, giving the saver and depositor lower returns than true inflation. Something’s got to give; governments cannot fund this anymore.”

“How can we continue to subsidise finance with zero transactions tax and almost zero capital gains when the budget hole is more than 10 to 15% GDP every year.”

Asia corporations, for example, pay very low dividends, because company officials still want to use the money for their investments, instead of giving the cash back to shareholders. “What is the retirement population going to live on for their cash flow? Upon the markets rising? The markets are not rising.”

“What is the true role of long-term institutional funds in corporate governance? We can’t allow the insiders to do it for their own benefits,” Sheng says. “If pension funds don’t look long term, then nobody else will.”

Public pension funds in North America are also seeking stronger ties in Asia to explore investment opportunities in the region. Their funds are increasing exposure in emerging market economies and moving into alternative asset classes to meet annual return targets.

“It’s obvious to most people that much of the growth in the world is in Asia,” says Doug Pearce, chief executive officer and chief investment officer at British Columbia Investment Management Corp, which has a 7% annual return target.

“We need to travel here, we need to build relationships, we probably need offices here for a much better understanding of the markets,” Pearce says. “We know there are Asian institutions that would like to invest in North America and maybe we can open some doors or share some of those activities, and have them reciprocated over here. We can’t be in every market, so we need to concentrate far more on our relationships and build those relationships.”

Similarly, some Asian institutional investors are looking beyond their domestic markets for higher returns on investment. Malaysia’s Retirement Fund Inc (KWAP) is reviewing its strategic asset allocation and is studying the feasibility of commitments to the UK market.

KWAP may open an office in London to facilitate possible investments, Chief Executive Azian Mohd Noh, says: “Definitely we have to look into more diversification. We are very mindful of the global economic condition, the fluctuation in local currencies and the risks that come with it. We are a pension fund though, so we have a rather conservative investment policy.”

KWAP is managing 77 billion ringgit ($24 billion) of funds, of which 90% are in domestic assets and the rest overseas. It has invested in real estate and private equity funds in London, Australia, Indonesia, Thailand and India.

About one-third of KWAP’s assets are invested in equities and the majority in fixed income including government and private debt securities, Azian says. It needs to have a large allocation to fixed income because it relies on the coupon payments to finance pension liabilities, she says. However Azian says “we might consider increasing our exposure if it fits return profile.

KWAP is starting with the London market first, and will probably include Europe as well in short order. “We think this is the best time to start thinking about it because the market is highly volatile now. If we can put our strategy in place now, we will be ready when the market is more palatable for us to enter.”

Since 2008, institutional investors have adjusted their strategies depending on needs, with some gearing more toward dynamic asset allocation and others increased reliance on in-house management.

CalPERS finds an enlarged cash allocation has given it “enormous comfort” to ride out current volatility in the markets. The large US public pension fund faced a liquidity freeze during the 2008 financial crisis and had to sell assets “in the midst of panic” to raise cash for pension payments. Since then, it has raised the cash target in its strategic policy allocation from 2% to 4%, or about $10.2 billion.

“We got a little taste of how that strategy worked. The 4% allocation on cash is a drag on overall performance,” Chief Investment Officer Joseph Dear, says. “That liquidity reserve was an enormous comfort because if we wanted the balance back, we can do that with relative ease. If we wanted to take advantage and book the prices of things on sale, we can do that. We run the fund on the basis that we take a very long view of investment opportunity and we should be able to take investment exposures that are volatile in the medium term.”