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Diversification efforts trigger Asian outsourcing boom


In the immediate aftermath of the global financial crisis, many Asian institutions reacted to what they perceived as poor performance on the part of their external asset managers by building out internal management capabilities and moving assets in-house. The results of the 2011 Greenwich Associates Asian Investment Management Study reveal that, over the past 18 months, institutions across Asia have reversed course: They are outsourcing assets and increasing — in some cases dramatically — the number of external investment management firms they employ.

Asian institutional portfolios expanded rapidly last year, with total assets under management increasing 20% from 2010 to 2011, to a total USD7.4 trillion. Over that same period, the pool of assets allocated to external investment managers grew even faster, increasing approximately 40% among investors that were interviewed by Greenwich Associates in both 2010 and 2011. As a result of that growth, the share of Asian institutional assets outsourced to external firms increased to USD1.1 trillion, moving to 15% of total assets in 2011 from 11% in 2010.
“If we exclude central banks and commercial banks, which manage most assets internally, the share of Asian institutional assets allocated to external managers actually increases to more than 30%,” explains Greenwich Associates consultant Abhi Shroff (pictured).
Despite the rapid expansion of the pool of assets available to external managers in Asia, it is important to view this growth in proportion: Total outsourced institutional assets among pension funds, endowments and foundations researched by Greenwich Associates in the United States stand at USD6.4 trillion.
Shift into Equities and Non-Domestic Investments Drives Manager Demand
Asian institutions have been turning to external active managers as they move to diversify their portfolios by adding equities and non-domestic investments. During the crisis months from 2008 to 2009, average allocations to equities declined from 25% of Asian institutional assets to 18%, and these allocations dropped further to 13% in early 2010. Fixed income allocations, meanwhile, expanded from 63% of total assets in 2008 to 73% in 2010.
Those trends reversed from 2010 to 2011, when fixed-income allocations declined from 73% of total assets to just 53% and equity allocations climbed from roughly 13% to 22%. Over the same period, allocations to alternative asset classes increased to 11% from 6%.
Although the strong growth in equity valuations across Asia contributed to these most recent shifts, institutions have been working actively to diversify their portfolios — a process that will continue for the foreseeable future. Large shares of Asian institutions expect to increase allocations to international, domestic and Asian equities as well as to alternatives, including hedge funds, private equity, real estate, and commodities. Few, if any, institutions plan to reduce allocations to equities or alternatives. In cash and short-term investments, the share of Asian institutions planning to reduce allocations is double the share planning increases, and institutions are mixed in their intentions toward domestic fixed income.

“As institutions reallocate assets from cash and domestic fixed income to equities, alternatives and international asset classes, they are increasingly calling on external managers who possess expertise and capabilities in these asset classes that are well beyond anything that most institutions possess in-house,” says Greenwich Associates consultant Markus Ohlig.

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