Finding Solutions to Investment Challenges: A Focus on APAC Asset Owners

The Asia-Pacific region is vast, with diverse markets, regulations, and investor base maturity. Yet institutional asset owners in the region confront many of the same challenges, such as shifting asset allocation strategies, evolving liquidity needs, cost margin pressures and the quest for better, more accurate data to enable decision-making. 

Coupled with these are external factors such as interest rate fluctuations, increased regulatory change, and geopolitical uncertainty that can have meaningful impact on asset owners and their ability to make sound investment decisions.

Northern Trust recently conducted a peer study of 180 asset owners across North America, EMEA, and APAC to identify global and regional trends. Respondents included senior leaders at pension funds, OCIOs and multi-managers, family offices, sovereign wealth funds, endowments, and other institution types, with portfolios ranging from $1 billion to over $500 billion. Of the APAC organisations that responded, 25% were from Australia, Hong Kong and Singapore, equally, and 13% were from New Zealand and Malaysia, equally.[1]

While individual countries within the APAC region may vary in how they allocate investments and manage risk and liquidity, the majority of asset owners agree on the importance of an effective operating model and the importance of service providers to help implement solutions that can make them more efficient.

APAC institutional asset owners increase alternatives in portfolios

Institutional asset owners in APAC maintain diverse asset mixes in their portfolios, with an average of 39% equity, 26% fixed income, 15% cash, 13% private markets and 7% hedge funds and absolute return investments.

APAC asset owners, like those in other regions, have reduced their exposure to equities over time, with private markets, derivatives, and even digital assets playing a larger role. In fact, the study shows that 88% of APAC respondents currently invest in alternative assets.

When asked to specify in which alternative asset they invest, APAC asset owners differed.   In Australia, for example, with regards to private markets exposure, 80% of respondents invested in infrastructure, vs 42% of global respondents. Singapore allocators had higher allocations to commercial real estate and Hong Kong had a higher concentration in private equity.  

This shift to private markets is drawn out by investors looking for diversification but also longer-term returns. With allocations to domestic equities largely maximized, private markets offer new opportunities. In this context, the growth in private market exposure reflects both a search for new sources of return and a broader evolution in portfolio construction strategies.

In Australia, the superannuation sector is driving the growing interest in private markets. Super funds are facing demographic changes like an aging population coupled with longer life expectancies, which is increasing pressure to deliver returns to meet rising retirement liabilities while balancing longer term investing. Combine this with unpredictable markets, interest rate changes and geopolitical instability and it’s prompting super funds to look beyond traditional investments and increase allocations to private markets, drawn by their potential for diversification and the long-term nature of private assets such as infrastructure.

Liquidity is a focus

When asked whether liquidity had become more or less important to their investment strategy over the past 12 months, 63% of APAC respondents said “more important”. This result was more pronounced in Singapore, where 80% of respondents agreed to the importance of liquidity, than in Hong Kong (60%) and Australia (40%).

For APAC asset owners, liquidity has become more important for a number of reasons. 72% of respondents noted that liquidity has become more important because of the interest rate environment and 64% noted the potential for higher returns. Liquidity is also an important consideration for investors with higher allocations to derivatives, which 43% of survey respondents confirmed they currently employ. These assets can be useful in adjusting portfolio exposure to market volatility and require liquidity to meet margin requirements and collateral obligations.

Another factor placing pressure on liquidity is the valuation of private market assets. Significant mark-ups or write-downs in these holdings can trigger the need for portfolio rebalancing, which often requires buying or selling other assets to maintain target allocations. In some cases, liquidity may not be readily available, prompting funds to rely on derivatives to manage exposure – a move that can create ripple effects across the broader investment process, with liquidity management at the core.

These compounding liquidity pressures lead to the need for robust liquidity strategies that can meet redemptions while maintaining portfolio stability. Some of the strategies cited in the survey include investing in lower risk short term cash vehicles, increasing their allocation to cash positions and employing more robust counterparty risk monitoring and management.

With regard to managing risk in their portfolios, 43% of respondents cited liquidity risk as a top consideration.

The survey showed that APAC institutional asset owners held more cash than their EMEA and North American counterparts at 15%, potentially because of these liquidity concerns. When asked for their target asset allocations, the average APAC respondent wanted to lower their cash positions to 13% and increase their exposure to other positions, especially absolute return, hedge funds, and diversifiers.

APAC seeking ways to enhance efficiency

Institutional investors across APAC are mindful of efficiency improvements, with many turning to data and technology to navigate market complexity and enhance decision-making. Faced with evolving regulatory requirements, the rise of private market investments, and the push for greater operational efficiency, asset owners are reassessing their technology stacks and data strategies.

Yet, significant challenges remain. For example, many Australian asset owners are challenged with solving for integrating data across different sources, consistency of data, and keeping pace with increasing regulatory demands. And the lack of senior data and technology staff is compounding the issue with only 30% of Australian respondents having a chief information officer (CIO) and 10% having a chief technology officer (CTO). In many cases, operational professionals are being asked to take on data responsibilities in addition to their core roles, without the specialised tools or expertise required. This double-hatting approach can lead to inefficiencies, stretch internal resources and limit the organisation’s ability to stay ahead of data infrastructure and integration needs.

As these pressures mount, asset owners are reconsidering how best to scale their capabilities and are looking to service providers for support. Key areas of focus include technology adoption (60%), automation (40%) and outsourcing of investment office operations (40%), where providers can help build more efficient, scalable infrastructures. Australia asset owners are leading other APAC asset owners in this regard, with 80% of respondents looking to increase technology adoption and half looking to outsource their operations.

Operational due diligence and enhanced reporting solutions and data support are also important as asset owners seek more real-time data, better integration of applications and more advanced self-service reporting tools. According to the study, 50% of Australian respondents look to service providers to support investment analytics. The majority of respondents in Singapore look to their service providers for investment due diligence support, and Hong Kong asset owners lean on service providers for better data and reporting solutions.

In the quest for better cost control, many asset owners are turning to service providers with specialised expertise in data and technology integration. These providers can offer dedicated support, reduce internal burdens, and bring purpose-built solutions designed to meet the evolving demands of the investment environment. Key areas of focus for Australian asset owners include technology product implementation and target operating model design (70%), where providers can offer the tools that help build more efficient, scalable infrastructures.

Asset owners may also turn to external providers to educate them and their boards about cybersecurity risks and how they are managed. It is likely that asset owners view external providers as better equipped to stay up to date on evolving privacy and cyber security needs and regulations, while also helping to keep costs down.

The path to growth

The path to growth for APAC institutional asset owners faces distinct challenges due to liquidity management concerns, sensitivity to interest rate changes, and allocations to illiquid assets. They are focused on enhancing their access to data and technological capabilities to increase efficiency and are seeking providers with the expertise to assist them in navigating regulatory changes and balancing risks, returns, and operational efficiency.

For more information on the peer study, please visit A-Suite to view the published paper, Asset Owners in Focus.

[1] Due to rounding, not all figures will sum to 100%