Asian institutions are seeking investments in growth sectors that are expected to gain from long-term structural changes, such as digitalization and sustainability, and are increasingly innovating to diversify risks and yields, according to Cerulli’s latest report, Institutional Asset Management in Asia 2021: Reassessing the Fundamentals.

Since the second half of 2020, Asian institutions’ have increased investment activity, in terms of reviewing their strategic asset allocations (SAAs) and issuing mandates to meet their pent-up demand for yields. As institutions navigate through the pandemic, they are placing more emphasis on risk mitigation and flexibility when managing portfolios.

Cerulli’s findings indicate that the quality of companies is the most important factor among asset owners and managers when constructing portfolios. Companies with better governance and financial indicators are expected to be resilient and are able to withstand external shocks or unanticipated events. Institutions increasingly recognize the value of sustainability integration to mitigate risk and generate alpha. Larger institutions have started to actively develop internal frameworks and issue sustainability-related mandates.

To further diversify portfolios, institutions are also committed to expanding their alternative exposures over the longer term for diversification and returns. Private credit, real estate, and infrastructure debt are among the areas of interest to draw higher gains from illiquidity premiums. Riding on the sustainability theme, institutions are increasingly interested in investing in relevant sectors, such as renewable energy, clean technology, and water.

“Increased focus on environmental, social, and governance (ESG) 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,” says Jaslyn Ong, research analyst at Cerulli. “In addition, managers need to rethink their ways of client servicing and marketing.” In fact, Cerulli’s survey of asset managers highlighted that dynamic portfolio management is expected as part of their services.

“Some institutions had momentarily deviated away from their SAAs amid the pandemic,” Ong adds. However, institutions are gradually turning to passive solutions, which offer a cost-effective way to diversify, mitigate risks, and gain overseas market exposure. “In addition, 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”.

With prolonged low interest rates and increased fee scrutiny, competition will only continue to intensify. As asset managers rethink their business strategies under various labels, including “holistic approach” and “customized solutions”, Cerulli believes it continues to be important for managers to understand their clients’ investment needs and work toward the latter’s best interests.