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October 31, 2013 - Territory

RISK OFF, RISK ON: Asia-Pacific Institutional Investors Prioritising Improved Approach to Risk

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  • APAC institutional investors with combined AuM exceeding USD2.2tr unanimously note changing risk culture in their organisations
  • 63% of institutions across 11 APAC countries agree that financial crisis has changed their investment approach
  • Australia, Japan and Hong Kong asset owners favour risk budgeting when modifying their investment strategy
  • 60% mention regulatory risk reporting as having some or significant impact
  • 44% report asset allocation as having become more conservative
  • Regulatory reporting requirements key challenge for Australia, Indonesia and Indian asset owners
  • Chinese asset owners moving towards developing their own credit rating systems for investments

Asset owners in Asia-Pacific have experienced a fundamental shift in attitudes towards risk since the financial crisis, leading them to favour more conservative investment and asset allocation strategies, and place an even greater focus on risk. This is according to a survey by BNP Paribas Securities Services of major institutional investors in the Asia-Pacific region, which together represent more than USD2.2tr in assets under management. KPMG was commissioned to undertake the research between April and June 2013.

All 27 asset owners surveyed reported more emphasis on risk within their organisations in line with growing corporate governance and increased regulatory scrutiny in the region. Management teams and boards of directors of pension funds, insurers, sovereign wealth funds and other asset owners in the region are looking for more detailed information on risk and performance of their investments and asset managers, according to the research.

63% of respondents agreed that the financial crisis changed the investment approach within their organisations, and almost half of those felt that their allocations had become more conservative – linking this to the overall risk-aware appetite of the organisation. Fixed income, or assets with fixed income-like qualities, were reported to be an area for increased investment as the region’s asset owners were attracted to the stable cash flows and less volatile returns of those instruments. It also emerged that hedge funds were consistently avoided by respondents, following what they perceived to be weak performance and issues around fees and credibility in the region.

Of the respondents who chose risk budgeting as the most important consideration when modifying their investment strategy, 78% were from Australia, Japan and Hong Kong. They saw risk budgeting, when the investor targets a total level of risk by splitting risk across the portfolio, as a natural evolution in line with asset managers across the globe who – while continually pushing for returns – are more focused on creating a balance between risk and returns. In contrast, other respondents from emerging economies such as China, Indonesia and India prioritised performance.

60% of the asset owners indicated that regulatory risk reporting had “some” or “significant” impact on their organisation, hinting at the operational challenges that lie ahead with increasing regulation. Australian asset owners in particular, pointed to the upcoming issuance of the “Stronger Super” reforms by their government this year, indicating that they are gearing up for additional regulatory requirements.

Madhu Gayer, head of investment reporting and performance, Asia-Pacific, BNP Paribas Securities Services said, “Although the global economy is recovering and Asia’s proved more resilient than most, it’s clear that 2008 was a watershed for asset owners in Asia-Pacific with profound change in their attitudes towards risk. They face a number of major challenges to integrating risk culture into their organisations. Data management, regulatory compliance and reporting, as well as talent management are all factors contributing to the overwhelming expectation from institutional investors in the region that spending on risk and performance measurement will rise in the next three to five years.

“BNP Paribas Securities Services is well placed to help asset owners in the critical areas of investment oversight, operational efficiency and regulatory compliance, as they adapt their strategies in the new environment.”

Bonn Liu, Partner at KPMG China, noted, “Asset owners in the region are facing a number of really uniform challenges although some will resonate more strongly. What is clear though is that on one front regulation is increasing while risk efficient yields are becoming harder to achieve, pushing asset owners into new territory in terms of asset allocation.”

As they expand their investment scope, seek increased diversification and look to introduce more environmental, social and governance factors into their investment strategies, asset owners in the region will continue to boost their analysis and reporting capabilities. Almost 75% of the region’s largest institutional investors expect to increase spending in this area and they see value in strengthening their relationships with their custodians and service providers to better face the challenges. This research demonstrates that while a number of Asia Pacific asset owners have made big strides in enhancing their capabilities, a lot more remains to be done.

BNP Paribas Securities Service – APAC Survey

Press Contacts:
Lilian Goh, Brand and Communications, Asia Pacific + 852 2909 8813 Lilian.goh@asia.bnpparibas.com
Christine Chan, Brand and Communications, Asia Pacific  + 852 2909 8847 Christine.chan@asia.bnpparibas.com
Andrew Achimu, BNP Paribas Securities Services + 44 207 410 2717 Andrew.achimu@uk.bnpparibas.com

About the survey

27 asset owners, based in 11 countries across Asia Pacific were interviewed about the strategic developments and emerging issues surrounding the expanding asset base and investment scope of asset owners in Asia Pacific. The survey took place between April and June 2013 inclusive, and comprised 26 questions structured around three key themes:

  • Drivers of change
  • Operational trends
  • Operational challenges

The interviews were approximately one hour in length and were conducted face to face or over the phone. Eight interviewees opted to provide written replies. Through these discussions and responses, the survey captures the diverse views of the market and offers insights into the dynamic and changing environment in which asset owners operate.

Respondents included public and private pension funds, official institutions (including central banks, statutory boards, and other official agencies), sovereign wealth funds, endowments and insurance companies, representing some of the largest and most prominent asset owners in Asia Pacific:

  • Total assets for all respondents exceed USD2.2 trillion
  • Over 70% are among the top 75 largest asset owners in Asia Pacific
  • Four are among the top 10 insurers in Asia Pacific
  • Two are among the 10 largest sovereign wealth funds in Asia Pacific
  • Two are among the five largest superannuation funds in Australia