Pension funds in Asia-Pacific (APAC) are showing increasing investment appetite for risk over the next three years and are stepping up their exposure to alternative assets in pursuit of enhanced returns, according to new research from State Street Corporation.

 

In terms of the alternative asset types, APAC pension funds show greater preference for direct loans compared with the global trend towards private equity as they remain focused on generating higher yield to meet long-term liabilities and deliver optimal value for plan members, the research paper, “Pensions Funds DIY: A Hands-On Future for Asset Owners,” reveals.

 

Based on responses from senior executives at more than 130 pension funds globally, the majority (88%) of APAC-based pension funds expect their appetite for investment risk to increase over the next three years compared with 77% of respondents globally. As part of this shift, pension funds intend to increase their exposure to alternatives as such assets types are increasingly seen as an effective investment strategy for enhanced returns. Pension funds in APAC are planning to increase their focus on providing direct loans to third parties over the next three years – 60% intend to do more of this between now and 2017, and 10% will enter this market for the first time.

 

State Street’s research also shows that 57% of APAC-based respondents intend to increase their exposure to real estate, with the corresponding figures for private equity and infrastructure at 45% and 41% respectively.

 

When it comes to hedge funds, 57% of APAC-based pension funds intend to increase their exposure to single managers, 13% will invest here for the first time and only 3% plan to reduce their allocation. In terms of fund of hedge funds, 32% plan to increase their allocation, 4% will reduce it and 18% will invest for the first time.

 

Kevin Wong, senior managing director and head of sector solutions for APAC said, “As volatility in the markets shows few signs of abating, pension funds in APAC are faced with challenging and complex liabilities while working to achieve the returns they need. They realize that they have to take on more risk.”

 

“APAC pension funds are better equipped than ever before to take on more risk with improvements in data management and reporting. Having a better understanding of the risk-reward profile of investments will bring them one step closer towards meeting their financial obligations and achieve better returns,” he adds.

 

Pension funds in APAC add that they intend to adopt a more proactive approach to managing their assets. They face the challenge of building a holistic view of risk across a multi-asset portfolio while aggregating risk data from multiple managers, aligning interests and managing costs.

 

Globally, 81% of respondents say that over the next three years they plan to increase the proportion of their portfolios to be managed in-house. In APAC, 79% hold the same view. This is partly because of cost concerns, with 27% indicating it is a challenge for them to justify the fees of their asset managers.