Allocators in Asia Rethink Post-Pandemic Growth Opportunities

Asian institutions are considering opportunities ranging from passive ESG strategies to private credit and infrastructure.

Ore Huiying/Bloomberg

Ore Huiying/Bloomberg

Since the second half of 2020, institutional investors in Asia have been changing their strategic asset allocation and shuffling their portfolios to reflect the new policies, research from Cerulli Associates shows. They’ve also been seeking investment strategies to meet what Cerulli called “pent up demand” for yield.

Over the next 12 to 18 months pension funds are most interested in allocating to Asian equity, global equity, Asian high-yield bonds, global high-yield bonds, infrastructure, and hedge funds, according to a newly released Cerulli report.

Triggered by the low-yield environment, asset owners and managers in Asia are going after growth opportunities using stocks as well as alternatives, including private credit, real estate, and infrastructure. About 30 percent of asset owners in the region have been looking to incorporate alternatives into their portfolio in 2021, according to data from the report.

Even with the demand for alternatives, allocators in Asia also have a growing interest in passive investment strategies. Sixty-nine percent of investors in the region are investing in exchange-traded funds and smart beta strategies to diversify and mitigate their risks and 41.4 percent said they are doing so for the lower management fees, according to the report.

“Active managers should perceive passives as complementing active strategies and a way to add value to clients, in terms of exploring new strategies and implementing strategic overlays during periods of volatility,” according to Jaslyn Ong, research analyst at Cerulli.

“Lower fees and underperforming active managers underpin the increased use of passives in the recent years,” the report said. Cerulli added that public pensions funds in Korea and Taiwan, in particular, are turning to passive strategies for their lower costs.


About 40 percent of institutional investors in Asia (excluding Japan) are integrating environmental, social, and governance strategies into their portfolios this year, according to the report. The top two ESG concerns are carbon emissions and employee well-being.

“Increased focus on environmental, social, and governance factors will help build more resilient portfolios over time and will eventually become a crucial requirement when selecting managers for both traditional and alternative investments,” according to Ong.

In a blow to active managers, nearly a third of institutional investors in Asia are increasing their ESG exposure through passive solutions, the report said. That is particularly true in mainland China, Taiwan, and Korea, where ESG-focused mutual funds and ETFs have grown rapidly.

Managers and institutions are being conservative, targeting companies that have good risk management systems in the post-pandemic era, the report added. About 70 percent of managers in Asia said they value the quality of companies to optimize returns this year.

“The quality of companies is the most important factor among asset owners and managers when constructing portfolios,” the report said. “Companies with better governance and financial indicators are expected to be resilient and are able to withstand external shocks or unanticipated events.”

Institutions are hesitant about investing in cryptocurrencies because of the speculative nature of these investments as well as a lack of transparency. “While some have begun researching this segment, others — such as GIC and Temasek — have indirect exposure to this sector via investments in blockchain- and cryptocurrency-related companies,” according to the report.

Sovereign wealth funds have made progress in doing direct deals. They’ve restructured, hired staff, and opened new international offices, and invested in digital capabilities.

That means managers will have to up their creativity to win business. “Any potential opportunities from SWFs will require managers to present novel investment themes, such as sustainable and alternative strategies,” said Cerulli.