‘Over 56% institutional investors plan to raise exposure in Asia’

Carlo Venes, managing director & head of institutional business, Asia, Fidelity International believes that globally there has been a fundamental shift in asset allocation by institutional investors towards emerging market with long-term funds still finding its way into the region. He tells DNA that current near-term concerns are not affecting the strategic asset allocation of large institutional investors into China and India. Excerpts:

What kind of shift have you seen in institutional demand for assets?
There has been a fundamental shift in allocation by large institutional investors over the last two to three years. Three years ago, there were a lot of discussions on whether to invest in emerging markets. We are seeing actual strategic flows from Europe.

Now, there is high direct demand from institutional investors in Europe, Middle East and Asia for more exposure to emerging markets (EM), particularly in Asia. If you look at institutional investors like central banks, sovereign wealth funds, insurance firms and pension funds, which is really the long-term smart money, for last several years we have not only seen an increase in demand but also substantial flows into broader Asian markets.

Asian investors still tend to have high concentration of assets in domestic markets because they are big and are further optimising their risk-return profiles in their portfolios. They are taking more global exposure. Several surveys point out that almost 25% of the Asian investors don’t think that current weightage of emerging market assets, which is just 13% in global MSCI benchmark, is the right reflection of economic growth that Asia will continue to see.

And that’s why, while the shift is there from local to global, they are not simply moving everything into global but are putting higher weightage on Asian and EM mandates than what they will get when they buy global benchmarks. Our recent surveys and daily interaction point out that they continue to allocate much bigger portion into Asian assets. In fact, more than 56% of Asian & European institutions surveyed plan to increase exposure to Asian equities over the next three years. We feel the shift is important as it is long-term and strategic.

But we have seen outflows from emerging markets, recently. What could be the reason?
If you analyse the outflows, majority of it is tactical ETF driven which tends to be more retail in nature. There has been a positive flow relative in favour of US markets due to shift in short-term fund. But, over the last two quarters, we continue to see demand and inflows from European and Asian institutional investors in this part of the world and its fair to say, that they see this more as an opportunity to get in at attractive timing because when they take a call, they don’t invest for next day, week or month. They invest for next five to ten years.

The tactical or passive ETF money may be the cause for recent focus of media on shift in flows from EM to developed world, but we absolutely haven’t seen any institutional reversal flows and the directional flow continues to be positive since last couple of years.

Within emerging markets, is there a preference for certain countries?
In case of Asian investors, they are less satisfied simply buying global benchmark. They compensate for that by going for regional mandates. They also want to make up for developed market bias by putting more country-specific allocations into the mix with 40% of the Asian investors maintaining China, 30% preferring South Korea and around 25% maintain India as dedicated institutional exposure. Europeans are less outspoken and only 12% of them have specific allocations towards China while 4% of them like India as dedicated exposure.

Are investors perturbed by the current Middle East crisis and resultant effect on emerging market economies?
There’s definitely a concern and focus to understand the impact of current situation prevailing in some of the North African nations and Middle East. I have not heard that there are higher concerns on investing in emerging markets versus the potential impact on developed markets. I don’t have specific view on how the things would span out and there’s definitely lot of uncertainty in the near-term. The institutions, which I mentioned earlier, don’t make strategic allocations for short-term and we have not seen any investment behavioral change based on the current uncertainty.

What do you make out of the risk profile of these institutional investors?
In Asia, there are some nations which are quite developed and some that are just emerging with different set of regulatory rules. There’s big dispersion in sophistication between investors in developed regions in Asia than economies which are just starting to look outside of their home market bias. So investment focus of each institution is different. If you are an insurance firm, having book of assets that ultimately serves to match liabilities, then you have totally different investment objective from sovereign wealth fund where you can go for absolute return type of approach that ultimately drives the type of assets classes and risks you can take with your assets.

Certain government banks in Asia can only invest in high quality fixed income while the sovereign wealth funds may take a private equity route. So scope of investment and asset allocation is diverse. One thing universal is that once they decide to move into Asia, they are not shy of taking risk.

So, as fund manger we see higher risk acceptance by investors for Asia ex-Japan region than what they may be having for developed markets. Asian investors are comfortable understanding what opportunities and upsides this part of world offers, but lot of investors in western economies are under estimating what’s happening in this part of the world and clearly are under invested.

Which sectors are seeing more preference by the investors?
It all depends on kind of mandate you run. If you run broad Asia Pacific ex-Japan mandate, then we typically have to follow benchmark index of Asia Pacific ex-Japan and the sectoral exposure comes out of that. But we have seen in few cases of dedicated institutional portfolios, there’s preference for sectors like health care and others like metals, mining and energy which are indirectly or directly related to commodity stocks globally.

Another interesting thing we have witnessed in last six months, is increased focus from more sophisticated investors in order to protect their portfolio against inflation, they are adding global inflation linked bonds instead of nominal bonds to get dedicated inflation protection. So there’s preference for commodity segment, global inflation linked bonds and real asset type of funds as they offer hedge against potential risk of inflation.