Southeast Asian asset owners eye alternative investments

05 December 2013   Category: News, Asia, Philippines, Thailand, Southeast Asia   By Toby Garrod

With assets in Southeast Asia suffering a downturn on the back of Fed tapering plans and an accompanying demise in risk-on thinking, asset owners in Southeast Asia are increasingly looking to alternatives for investment opportunities. While the lull in market activity across the ASEAN region may be temporary, such allocations are likely less so.

The Provident Fund Office in the Philippines sees few other options: “If you look at the composition of our assets under management, about 40% comprises loans to members, which average an interest rate of 8%,” says Victor G Garlitos, director of the Provident Fund Office, under Bangko Sentral ng Pilipinas. “The remaining 60% is divided up between fixed income and equities. The share of equities, in percentage point terms, is 35%, while the share of fixed income is 25%. Hitting double-digit returns with fixed income at that weighting is a challenge, as returns on the asset class are just 5%. So we have two options: increase our allocation to equities to 40%, but risks will increase there, or engage in alternative investments – probably hedge funds or commodities. My problem now is how to convince our board of trustees. They are too conservative.”

Southeast Asian asset owners have tended to suffer long-term performance problems at the hands of their respective domestic sovereign bond markets, which have been rated increasingly highly over the past decade, in turn, leading their yields downward. This has increased reliance on equity, which is also underperforming now.

“We allocate approximately 22-23% to equities, for a return of about 6.9% per annum,” says Dr. Man Juttijudata, senior director at the investment strategy department of Thailand’s Government Pension Fund. “But equity returns are decreasing nowadays. I think that in order to meet the long-term objectives and have sufficient funds, we need to suffer volatility in the short run. We have to move our portfolio to become more aggressive, increasing our weightings [away from bonds] and toward equity and alternatives. But if we have higher allocation to equity, we’re going to face volatility. Another option is to add more alternatives; here we’d prefer to go more for real estate, which we believe gives good, stable returns in the long run.”