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APAC investors seek active return but still risk conscious, survey finds
In search of higher returns, institutional investors around the globe plan to reallocate their portfolios in the next 12 months adding equities and alternative investments at the expense of developed market sovereign debt, the latest Global RiskMonitor survey by Allianz Global Investors shows
The Asset 12 May 2014

In search of higher returns, institutional investors around the globe plan to reallocate their portfolios in the next 12 months adding equities and alternative investments at the expense of developed market sovereign debt, the latest Global RiskMonitor survey by Allianz Global Investors shows. In line with their global peers, around 30% of Asia-Pacific investors said they want to increase their allocation to international equities, with just 8% wanting to reduce their position.

 

Emerging market equities are also on the buy list of 27% of the survey's Asia-Pacific respondents, despite 14% looking at reducing their allocation which is slightly higher than the global average (8%). Investor appetite for domestic stocks is the strongest in Asia-Pacific than in other regions, with 31% of Asia-Pacific investors (global: 21%) increasing their allocation, and only 8% (global: 15%) are looking to reduce it.

 

Taking a closer look at institutional investors' allocation plans, the report shows that global respondents that don't want to decrease their allocation to fixed income are likely to increase their allocation to international and emerging market equities. Asia-Pacific investors, on the other hand, remain to have a relatively healthy appetite for their fixed income allocation, especially in corporate high yield and emerging market sovereign debt.

 

Elizabeth Corley, CEO of Allianz Global Investors, said: "The 'great rotation' has been talked about at some length over the past two years, yet action among institutions has been slow as risk aversion or inertia make their impact. The findings of our survey suggest that investors are now showing an increased appetite for risk-bearing assets, specifically equities, and with a more benign overall economic outlook in prospect, are willing to embrace risk premia. In a low interest rate environment, it is essential that institutional investors take action to re-allocate their portfolios towards risk-bearing asset classes and it is encouraging to see that beginning at least in intention. We firmly believe at the moment, that the biggest risk investors face is taking no risk at all."

 

"With the lowest interest in holding cash, institutional investors in Asia-Pacific are showing signals that they are ready to seek active returns by reallocating their portfolios with active, risk-seeking strategies. In addition to adding equities to increase alpha returns, Asia-Pacific investors also demonstrate appetite for some of the more risk-bearing fixed income assets such as corporate high yield and emergent market sovereign debt."

 

Allocations to alternatives on the rise

 

Global institutional investors' exposure to alternative asset classes is likely to grow over the next 12 months. In line with global consensus, 66% of Asia-Pacific respondents (global: 62%) believe that alternative investments are a suitable substitute for debt and/or equity investments in a balanced portfolio, and half (global: 46%) think that alternatives help detach investors from market volatility.

 

Direct investments in real estate, private equity and hedge funds seem to be most likely to grow in global, especially Asia-Pacific, investors' portfolios, with 23%, 21% and 16% of Asia-Pacific respondents (global:18%, 15% and 14%) saying they would increase their allocation to these asset classes respectively. Investors also plan to increase their allocations to the relatively new asset class of infrastructure debt.

 

Investors, however, see the limitations of the traditional risk management toolkit when it comes to measuring and managing risks related to alternatives. Only about 15% of Asia-Pacific investors (global: 17%) agree that these are able to measure, value and manage the risks posed by alternative assets effectively. The survey shows that the biggest room for improvement in this respect can be found within private equity.

 

Interest rate risk tops investors' minds

 

More than half of the survey's respondents (global: 57%; APAC: 62%) believe that interest rate risk is a severe or considerable threat to their portfolios' performance over the next 12 months - the most pressing concern of any. Asia-Pacific investors seem to be generally more risk conscious, expressing stronger than average concerns over six out of nine risk factors stated in the survey. Their fear towards equity market risk, in particular, stands out from the global respondents (global: 44%; APAC: 52%).

 

Tail risk, cited as the most pressing concern in the last edition of RiskMonitor, has moved down in the perception of investors and now ranks fourth, with 31% of the global and Asia-Pacific respondents mentioning it as a severe or considerable threat. Seven out of 10 survey participants have put efforts into making their analysis of tail risk more thorough in recent years, with 60% employing risk budgeting strategies to manage these risks.

 

In terms of risk management approach, 65% of global respondents use duration management, 59% mention asset class diversification and 53% dynamic asset allocation as their most frequent risk management strategy. While Asia-Pacific investors adopt a largely similar risk management strategy, they seem to be less receptive to duration management (56%) than their global peers.

 

Elvin Yu, head of institutional business, Greater China and Southeast Asia, Allianz Global Investors, said: "Five years from the global financial crisis, institutional investors across Asia Pacific seem to be in a stronger position than their global peers to embrace a full-on "risk-on" investment approach, with proven appetite for risk-bearing assets including domestic equities, corporate high yield, emerging market sovereign and alternatives. However, a number of risk factors, particularly those related to interest-rate, equity market and credit, are still haunting - possibly due to the high uncertainties and volatilities in some of the emerging markets across Asia-Pacific."

 

"We believe a sound, customized and professionally managed risk management solutions would be key to help investors to understand and navigate increasingly complex challenging market conditions, globally and within the region, so as to fully capture market opportunities to achieve alpha returns for their portfolios."

 

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