State Street : Asia Pacific Pension Funds Fuelled by Rising Risk Appetite Eye Alternative Assets in the Chase for Yield, State Street’s Research Shows

HONG KONG - 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 (NYSE:STT).

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 percent) of APAC-based pension funds expect their appetite for investment risk to increase over the next three years. That's compared with 77 percent 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 percent intend to do more of this between now and 2017, and 10 percent will enter this market for the first time.

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

When it comes to hedge funds, 57 percent of APAC-based pension funds intend to increase their exposure to single managers, 13 percent will invest here for the first time and only 3 per cent plan to reduce their allocation. In terms of fund of hedge funds, 32 percent plan to increase their allocation, 4 percent will reduce it and 18 percent 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 percent 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 percent hold the same view. This is partly because of cost concerns, with 27 percent indicating it is a challenge for them to justify the fees of their asset managers.

Some key trends that emerged from the research include:

• As part of the shift towards in-house management of assets, more than half (53%) of pension funds in APAC are expecting to use more lower-cost strategies to achieve desired investment outcomes, as well as expanding the number of technology platforms and software solutions they employ (27%).

• Data management (46 percent), regulatory compliance (43 percent) and overall governance (38 percent) top the list of "high priority" that pension funds will be looking to strengthen in the next three years.

On behalf of State Street, the Economist Intelligence Unit conducted a global survey of institutional asset owners during July and August of 2014. The survey garnered 134 responses from pension fund executives, spanning both defined contribution and defined benefit assets. Forty-two percent of respondents were from the Americas, 36 percent from EMEA and 22 percent from Asia Pacific. Just over half (52 percent) of respondents came from public sector pension funds, 31 percent from private sector pension systems and 16 percent from superannuation funds.

To view the report, please click here: http://www.statestreet.com/vision/assetowners/

About State Street 
State Street Corporation (NYSE: STT) is one of the world's leading providers of financial services to institutional investors including investment servicing, investment management and investment research and trading. With $28.47 trillion in assets under custody and administration and $2.42 trillion* in assets under management as of September 30, 2014, State Street operates in more than 100 geographic markets worldwide, including the US, Canada, Europe, the Middle East and Asia.www.statestreet.com.

* Assets under management include the assets of the SPDR® Gold ETF (approximately $30 billion as of September 30, 2014), for which State Street Global Markets, LLC, an affiliate of SSgA, serves as the distribution agent.

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