Asia sees higher asset allocation to alternatives at 7%, with exposure to foreign equities increasing.
Asia, 1 August 2022 – Growing awareness of environmental, social and governance (ESG) considerations, market reforms as well as government-led initiatives have propelled investors in Asia furthest along the journey to sustainable investing practices, compared to Latin America, the Middle East and Africa.
This is according to Mercer’s Asset Allocation Insights 2022 report, which summarizes the decisions pension fund investors in these regions are taking with their investment strategies. The annual report covers more than US$5.9 trillion in assets under management, including the Dubai International Financial Center Employee Workplace Savings (DEWS) Plan, a new entrant this year.
Government-led initiatives are strengthening the overall focus on ESG in markets such as Hong Kong SAR, Singapore along with South Korea. The South Korean government, for example, plans to introduce requirements for companies listed on the securities exchange to disclose information about their ESG position, with voluntary reporting until 2025, phasing in mandatory disclosure until 2030 when reporting is required for all listed companies.
Investors are also shifting to adapt to ESG risks when considering their investments, with significant growth seen in ESG-oriented products offered, as well as adoption of guidelines and principles by investors across the region. Mainland China, for instance, is encouraging companies to voluntarily report their carbon emissions and fostering the innovation and development of financial products to respond to the need for climate risk mitigation and transition into a low-carbon economy.
Janet Li, Asia Wealth Business Leader, Mercer, said, “Incorporating ESG into investment decisions has come to the fore and we see countries across Asia increasing their Green, Social and Sustainability Debt or Green Bond issuance that has created a much broader market in which both institutional and retail investors can participate.
“To tackle ESG issues successfully, it is important for investors to first be clear on their targets and objectives, as well as their investment beliefs and governance budget in order to design implementation plans accordingly. There is no right or wrong answer, but only whether the approach is going to lead to the desired outcome and by when. This is where we often see investors needing help.”
Asset Allocation Trends in Asia
Asset allocation for the Asia ex-Japan region1 is broadly aligned with the overall survey averages. However, the area has a higher allocation to alternatives of about 7%, compared to an overall survey average of approximately 4%. Over the same period, Taiwan’s allocation increased from 1.9% to 9.6%, which includes REITs, listed infrastructure and multi-asset strategies. In South Korea, the National Pension Service has a meaningful allocation (10.9%) and plans to increase this to 15% by 2025. Asian investors are also showing continued interest in alternatives to diversify portfolios amid a low interest rate environment, as they seek diversification from traditional asset classes.
Over the past few years, Asia ex Japan investors have held allocations steady, with modest increases to alternatives over the full measurement period. Hong Kong SAR has the highest equity allocation in the region at 67% while South Korea has the highest allocation to alternatives amongst all markets in the region at 9.7%. Taking a different approach altogether, India’s fixed income allocation is significant at close to 89%.
Driven by shifts in South Korea, Taiwan and Thailand, the exposure to foreign equities has also increased for equity portfolios in Asia, from 36% in the inaugural period to 48% in the current period. Taiwan’s largest public pension fund has also announced intentions to increase its allocation to foreign assets over the next few years. Overall, the trend toward larger allocations to foreign equities is expected to continue.
Foreign fixed income has remained a relatively low portion of fixed income assets in the region, although it has increased modestly to 13% in the current period.
Broadly in Asia, and particularly in Hong Kong and Singapore, the report also highlights a rising interest in outsourced chief investment officer services from institutional investors that are looking for the ability to delegate certain areas of responsibility for their plans.
On this year’s findings, Ms. Li said, “Investors are more concerned about inflation now than a year ago and they are considering higher allocations to asset classes with inflation protection qualities to enhance the resilience of their portfolios. While it may seem that alternatives have held steady, it is worth noting that capital commitments waiting to be deployed would be held in other asset classes currently. Real growth to portfolios is the key focus as investors have liabilities to pay or return targets to deliver. A multi-asset diversified portfolio will be more likely to lead to successful outcomes under volatile market conditions.”
1 Given the size of the Japanese pension system, including the Government Pension Investment Fund (GPIF), trends for Japan and the rest of Asia are reviewed separately.
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Regional breakdown for Latin America and Middle East & Africa
Overall, asset allocation did not move significantly over the past year for all the regions surveyed. However, there was a decline in fixed income to just under half of aggregated assets (49%) and a corresponding modest increase in equity, while alternatives and cash remained steady. The declining proportion of fixed income in the aggregate assets of plans in Brazil and Chile, and the increasing proportion of equities within the plans in Japan, were partial drivers of this shift.
Latin America’s asset allocation contains some interesting differences relative to the survey’s overall average. Fixed income is higher (63% for Latin America versus 49% for the survey average), largely driven by Brazil and Mexico. The allocation to alternatives is also higher (6.6% versus 3.9%).
Fixed income allocations have decreased since the prior period, especially in Colombia, where they declined by close to nine percentage points; this was in part due to market movements. As such, we may see a reversion toward more fixed income in future periods in order to maintain strategic allocation targets. Alternative assets are especially prevalent in Peru and Colombia, followed by Mexico. In general, these comprise private equity and real estate and allocations have been rising meaningfully over the survey period.
Equities are more diversified into foreign assets, with nearly 56% of equity assets invested outside the domestic market, compared to a survey average of approximately 49%, though there are significant divergences in the region.
Middle East & Africa
This region was more heavily invested in equities compared to the overall survey positioning, with 55% of total assets in equities relative to 39% for the survey average. South Africa had a particularly high exposure to equities at 61%, with 31% of total assets in fixed income.
The DEWS Plan in Dubai’s financial free-trade zone represents members’ investment selections across its menu of diversified fund offerings and ended the period with 32% of total assets in equities and 12% in alternatives (real estate). In Turkey, concerns about economic and market volatility have led to an allocation of over 51% in fixed income and cash combined, as well as a large allocation to “other” (mainly representing precious metal funds and public-leasing certificates, which are securities issued by asset-leasing companies with returns tied to revenue received from the underlying asset).
South Africa has decreased exposure to foreign markets during the recent period, within both equities and fixed income, although foreign equity investments are up slightly as a proportion of total equity assets over the full measurement period.