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CHANGES ON
THE INSTITUTIONAL
INVESTMENT HORIZON:
Asia-Paciﬁc investors seek balance
between risk and responsibility
Sponsored by:

© The Economist Intelligence Unit Limited 2017
Changes on the institutional investment horizon:
Asia-Pacific investors seek balance between risk and responsibility
Introduction 1
About the research 2
Key takeaways 3
Near and far horizons 4
The effect of the hunt for yield 4
Eyes still on the long-term prize 5
Reputation and responsibility 6
Managing risks and changing styles 8
Passive money and the curse of correlation 8
Daring to find difference 9
Looking to new products, new markets 10
Boxout: Rolling with regulation 12
Seeking a sustainable future 13
A rising tide 13
Navigating a new world of esg investment 14
Appendix 15
Contents
1
2
3

Investors are confronted with difficult decisions
and adverse circumstances as a matter of course.
But in the current environment, Asia-Pacific
institutional investors seem deserving of particular
sympathy. Like their peers elsewhere, they are
struggling to balance long-term liabilities with the
need to secure yield in a world where it is
increasingly scarce, which almost inevitably
opens the door to greater volatility and risks. And
as elsewhere, the rising tide of local and global
regulation, coupled with the increasing
prevalence of sustainability mandates and
environmental, social and governance (ESG)
targets, is piling complexity onto this process.
But Asian institutional investors are also
contending with unique challenges. Their home
region is the world’s fastest-growing, presenting
no shortage of opportunities but also no shortage
of risks that could cloud a long-term investment
approach – from China’s growing debt burden to
competing territorial claims in the South China
Sea and an increasingly bellicose North Korea.
Many of the region’s largest economies,
including China, South Korea and Japan, are
aging rapidly, threatening the future viability of
pension systems and putting additional pressure
on pension funds and insurers to boost returns. In
China, for example, the working-age population
is forecast to fall by nearly one-quarter by 2050.
Climate change is also forecast to hit Asia
particularly hard, with the Asian Development
Bank recently warning of potentially severe
impacts on economies, infrastructure and
agriculture. Of the 20 major cities set to bear the
brunt of global flood-related losses, expected to
reach US$52bn annually by 2050, 13 are in Asia.1
All this leaves Asia’s institutional investors with
the unenviable task of reconciling competing
and sometimes contradictory objectives,
simultaneously factoring in current trends and
long-term possibilities, all while being subject to
the scrutiny of regulators, stakeholders and, in
many cases, the general public. How Asian
investors approach this delicate juggling act, and
how it is shaping their future strategies, is the
subject of this paper.
Introduction

© The Economist Intelligence Unit Limited 2017 2
In June-July 2017, the EIU surveyed 571 institutional
investors around the world. The research, which is
a part of the Changes on the institutional
investment horizon programme sponsored by
Franklin Templeton Investments, explored how
investors around the world are adapting to
changing fundamentals and risks, the effect on
the investment time horizons and asset allocations,
and the impact on long-term objectives.
In Asia-Pacific, the survey included 200
respondents. Of these institutional investors, 56 are
from commercial banks, 52 from insurance
companies, 41 from pension funds, 30 from
endowment funds, and 21 from corporate
treasury funds. 73 are large, in that their assets
under management (AUM) exceed US$5bn. The
remaining 127 investors have AUM of between
$1bn - $5bn.
Among the respondents, 96 are c-suite
executives, and the remaining 104 are non-
c-suite Senior executives.
We would like to thank the following individuals
who lent their time and perspectives in interviews.
They are in order of their surnames:
 Paul Carrett, CIO, FWD Insurance
 Liu Chunyen, group CIO, AIA
 Paul Ewing-Chow, associate director, Public
Affairs, Temasek
 Boris Moutier, regional CIO, AXA Asia
 John Woods, CIO, Asia-Pacific, Credit Suisse
 Heman Wong, former executive director,
Hospital Authority Provident Fund Scheme
About the
research

In Asia-Pacific, a prolonged low-yield
environment and evolving regulatory landscape
have prompted many institutional investors to
take more short-term actions in a hunt for yield.
Thirty percent of those surveyed say they are more
actively managing their investments, 45% say they
have reallocated asset classes due to regulations,
and 52% are increasing portfolio turnover despite
increased riskiness.
However, the short-term search for higher returns
stands in seeming contradiction to Asia-Pacific
investors’ approach towards their return targets in
the current investment environment. Only 26% say
immediate pressures have prompted them to
adopt a short-term approach to setting return
targets, while 39% say these pressures have
actually made them more focused on long-term
objectives. This places many Asia-Pacific
institutional investors in a delicate balancing act
between strategizing for long-term growth and
trying to capture returns that come into the
market on a short-term basis.
Asia-Pacific investors see market volatility as
the number one barrier to lengthening their
investment horizon; other top five reasons include
reputational risk, short-term requirements, the
global economic outlook and regulatory change.
As a result of these fears, in portfolio monitoring
28% of respondents say they are more focused on
their fiduciary obligations and 27% say they are
more focused on their principles and social/
objectives before prioritizing long-term
performance. This also highlights the reality that
many regional investors, particularly sovereign
wealth and pension funds, have explicit political
and social benchmarks along with long-term
performance goals.
In managing their risks, Asia-Pacific investors are
particularly concerned with non-financial (for
example, geopolitical) risks and correlation risks,
which are leading them to seek diversification
across international markets, particularly those in
their own backyard. Being already well-versed in
their region, 56% of Asia-Pacific investors say they
are more likely to increase portfolio allocations to
high-growth Asian markets such as China and
India. A smaller percentage, 32%, say they are
planning to diversify outside the region to manage
risks.
Asia-Pacific investors are also increasingly
seeking alpha and diversification benefits in
alternative assets and new products. For 42% of
respondents, the increasing use of alternative
investments such as private equity, private debt,
commodities and real estate is one of the top two
ways to manage risk, second only to risk
budgeting. Others are exploring diverse,
uncorrelated assets from infrastructure to forestry.
More use is also being made of derivative
products as a means to both hedge risks and
enhance yield.
Focus on environmental, social and governance
(ESG) investment principles or targets is a rising
regional trend. Almost two-thirds of investors
polled (62%) expect to increase exposure to ESG
or principle-based investments over the next
three years, and 22% expect to boost exposure in
the next 12 months.
Key
takeaways

The effect of the hunt for yield
With interest rates and yields on institutional
investment mainstays, particularly developed-
market government bonds, near historic lows,
many investors have been forced to adjust their
strategies and look farther afield to eke out returns
– often taking on more risks in the process. The
Organisation for Economic Co-operation and
Development (OECD) has warned of an
“excessive” hunt for yield heightening insolvency
risks for pension funds and life insurers as they
struggle to meet the commitments made to
beneficiaries or policyholders when financial
markets were broadly capable of producing
better returns.2
“The return target tends to reflect the risk free
rate [RFR], whatever that might be,” says John
Woods, CIO Asia-Pacific at Credit Suisse. “If the
RFR is 5%, then investors tend to want the RFR plus
a spread. If the RFR is 0%, then that influences the
target. Ten to 15 years ago investors wanted 15%,
now they want 3% and they would be happy with
2%. Anybody who wants 15% now will have to go
to a casino.”
Asian institutional investors aren’t heading for
the roulette wheel, but research has shown they
have tended to adopt a shorter-term outlook and
adjust portfolios more frequently than those in
other regions. Our survey indicates the search for
yield is likely to exacerbate this tendency.
A majority (52%) of Asia-Pacific respondents
say they are taking more short-term actions such
as increasing portfolio turnover to find yield,
despite the increased risk such actions entail.
Nearly one-quarter (24%) say they are doing so
frequently, versus 21% in North America and 17%
in Europe, the Middle East and Africa (EMEA). A
significant proportion (40%) also say they have
adjusted their average holding periods to be
much or somewhat shorter in response to low
yields, worsening demographics in developed
markets and the pressure to generate alpha, or
returns in excess of benchmarks.
Near and far horizons
1
Asia-Pacific institutional investors
increasing short-term actions
% respondents
Asia-Pacific institutional investors adjusting
holding periods
% respondents
Increasing short-term actions 52
Not taking short-term actions 47
Don't know 1
Shortened average holding periods 40
Have not adjusted average holding period 42
Lengthened average holding period 15
Don't know 4

50%
40%
30%
20%
10%
0%
Australia China Hong Kong Japan Malaysia Singapore Thailand
2015
2050
Asia-Pacific's Ageing Population
% of people aged 60 or over
Source: UN World Population Ageing 2015
“The need for yield has been a slow burn and
we have seen investors going down the credit
curve,” says Paul Carrett, group CIO at FWD
Insurance. “Short-term it doesn’t seem so
dramatic, but if you look at it over a longer point
of view it’s been pretty dramatic. And we could
see a dramatic reaction at some point when we
have a crisis.”
Eyes still on the long-term prize
Standing in apparent contradiction to this
behaviour is the increasing weight placed on
long-term goals. Only around one-quarter (26%)
of respondents say immediate pressures have
prompted them to adopt a shorter-term approach
to setting return targets, and 29% that their process
for determining return targets has not changed.
Furthermore, 39% say these pressures have
actually made them more focused on long-term
objectives.
For insurance companies the strategic focus
might be on long-term growth for policyholders
and shareholders, but as Liu Chunyen, group CIO
at AIA, explains, “This is not to say that we don’t
take short-term opportunities to increase yield…
We’re aiming for long strategy, longer-term
investment horizon, longer-term assets, but we will
increasingly look at more opportunities that come
into the market on a short-term, technical basis.”
It is a delicate balancing act. For those with
lengthening liabilities, like pension funds, short-
term volatility or adverse market conditions
highlight the difficulty of achieving future targets,
particularly in markets where demographic
trends could call the very existence of such funds
into question.
In Japan, for example, more than one in four
people was aged 65 or over in 2015 but by 2036
one in three will be. This will challenge “pay as you
go” pension funds that will have to support a rising
number of retirees with contributions from a
shrinking workforce – a gap that even the best
strategies to maximise investment returns will
struggle to address. There are currently 2.3
working-age Japanese for every retiree, but this
will decline to 1.3 by 2065.
Not surprisingly, 55% of Japanese survey
respondents say they have increased their focus
on longer-term objectives, the highest rate in the
region. The demographic issue is, however,
virtually an Asia-wide one; Hong Kong will shed
over half a million workers by 2064, and in Thailand
the working age population’s share of the total
will shrink by 11% to 2040 – the steepest decline in
developing Asia.
The need, then, to lengthen investment
horizons to match lengthening liabilities is vital
and generally understood, but near-term
concerns often stand in the way. When asked to
identify the biggest barrier to this process, the
highest proportion (35%) of Asian institutional
investors cite market volatility which is also the top
pick among investors in North America and EMEA.
This may seem counterintuitive with the
Chicago Board Option Exchange’s Volatility Index
(VIX)—a global market volatility benchmark—
plumbing historic lows, but there are ample
indications that investors across the world expect
volatility to rise. In Asia, too, there is no shortage of
memories of relatively recent market shocks, from
the “taper tantrum” in 2013 when the US Fed
hinted at unwinding quantitative easing, to

Market volatility
Reputational risk
Short-term requirements
Global economic outlook
Regulatory change
Lack of staff incentives
Governance rules
Media influence on decision makers
Silos within the organisation
Barriers to longer investment horizons
% respondents, with two choices
35
29
27
27
23
17
15
15
14
China’s dizzying stock market plunge in 2015, to
the descent of the Malaysian ringgit in 2017 to
lows not seen since the Asian financial crisis. The
challenge for institutions making for a distant
shore is to contend with the waves they will
encounter en route.
“We are fully conscious that with a portfolio
largely comprised of listed assets, we are not
immune to short-term market volatility,” Paul
Ewing-Chow, associate director for public affairs
at Temasek, Singapore’s S$275bn (US$200bn)
sovereign wealth fund, wrote in an email interview.
That said, “[G]iven we own our assets – as opposed
to being a fund manager on behalf of the
government – we don’t have redemption
obligations, and have full flexibility to buy, sell or
hold assets over longer-term horizons, to deliver
returns over our risk-adjusted cost of capital.”
Reputation and responsibility
Asia-Pacific investors also identify reputational
risk as the second biggest impediment to
extending their investment horizon, picked by 29%
of those surveyed. This compares to 26% in EMEA
and just 20% in North America, indicating Asian
fiduciaries may be more sensitive to government
or public opprobrium for performance or
administrative lapses.
This sensitivity may exist for good reason, as
there are multiple recent, relatively high-profile
examples of institutional investors coming under
the microscope. In South Korea, insiders at the
massive National Pension Service, the world’s
third-largest pension fund with US$497bn of assets
under management (AUM), have pointed to
parliamentary audits and political interference
blunting its ability to generate returns. Australian
superannuation funds and insurers have come
under fire over potential conflicts of interest and
alleged reluctance to pay out claims. In China,
regulators have targeted the insurance industry
over its allegedly aggressive investment strategy
and warned of potential reputational damage.
Similarly, in portfolio monitoring, Asian investors
seem more focused on their fiduciary obligations
and social benchmarks than long-term
performance. Fiduciary responsibility (28%) and
principles/social objectives (27%) are the top two
factors driving portfolio monitoring in the survey,
followed by long-term performance. This is similar
to the breakdown in EMEA but not North America,
where long-term performance comes marginally
ahead of principles and social objectives.
This highlights the reality that many regional
investors, particularly sovereign wealth and
pension funds, have explicit political or societal—
in addition to long-term investment—goals. China
Investment Corporation’s main pledges, for
example, include “preserv[ing] and increas[ing]
the value of state-owned financial assets”,3
while
Khazanah Nasional, the Malaysian government’s
sovereign wealth fund, plays a “catalytic role in
driving various strategic industries and national
initiatives”.4
Along with short-term market developments,
these principles have the potential to complicate
the formulation of long-term investment strategies.
And achieving social mandates is unlikely to
absolve institutions of the need to boost returns to
meet future obligations, underlining again the
web of interests investors must navigate as they
make decisions and manage portfolios.

Portfolio monitoring drivers
% respondents
42
35
33
32
31
Fiduciary responsibility 28
Short-term performance 17
Long-term performance 21
Principles / social objectives 27
Reputational risk 9
“Pension funds need to think more from the
angle of the beneficiaries,” says Heman Wong,
former executive director at Hospital Authority
Provident Fund Scheme in Hong Kong. “They
need to be careful that they don’t do only what
they are supposed to – if members are unhappy,
this can be very damaging.
“This is particularly something that needs to be
addressed in Asia where some of the pension
funds have grown very big too quickly. There is a
big knowledge gap as the region does not yet
have enough investment professionals.”

Managing risks and changing styles
2
As investors juggle at times competing goals and
adjust portfolios or styles more frequently, the risk
picture has changed significantly for many. No
longer can institutions simply park most of their
funds in relatively stable government bonds and
expect solid returns to meet their liabilities
decades ahead; portfolios are now more typically
spread across a broader range of assets that
carry various risk exposures and duration profiles.
This has increased worries about risk and
redoubled the industry’s emphasis on risk
management.
In the Asia-Pacific region, financial stability risks
and the economic cycle are the main worries of
institutional investors, picked as the top two
concerns by 43% and 40% of survey respondents
respectively. This again points to heightened
awareness of the possibility of short-term market
developments—such as another sudden currency
devaluation in China, or a dip back into deflation
in Japan—derailing strategies and long-term
investment goals formulated for times of relative
stability.
Risk concerns in Asia also have a more
pronounced geopolitical dimension given
potential flashpoints such as the Korean Peninsula
and the South China Sea, and trade-related and
other warnings directed at countries like China
from the Trump administration. Non-financial (for
example, geopolitical) risks are cited as one of
the top two biggest risks to achieving long-term
investment targets, selected by 47% of Asian
investors. This view is shared in EMEA but not in
North America, where institutional investors are
more concerned about short-term volatility and
liquidity.
Passive money and the curse of correlation
Asia-Pacific and EMEA investors also agree that
correlation risk is the other main threat, with 50%
and 58% respectively placing it in the top two risks
to long-term investment goals, versus just 40% in
North America. In essence, this is the fear that due
to close correlation between the various assets in
a portfolio, adverse events can cause significant
losses across all of them.
Financial stability risks
The economic cycle
Mispricing of risk
Market volatility
Portfolio diversification
Geopolitical uncertainty
Corporate governance
Inflation
Current concerns of institutional investors
43
40
30
27
21
17
15
8

Diversification—that is seeking assets that are
not correlated (or are negatively correlated) so
that a single event or trend doesn’t devastate the
whole basket—reduces portfolio risk. But
diversification has become more elusive. The
globalisation of financial markets, an extended
period of massive liquidity from central banks,
and the hunt for yield have resulted in a flood of
cash into a wide range of assets, breaking down
traditional correlation patterns. Even stocks and
bonds, which historically tended to move in
opposite directions, have more recently been
moving in tandem.
The exponential growth of passive funds,
particularly in the US, where passive investments
are expected to account for over half of assets
under management in the next four to seven
years, has been blamed for exacerbating
correlation and further challenging diversification.
“If you look at it from the perspective of long-
term investors such as ourselves, we do worry at a
systematic level and whether there are enough
people making an active decision about what
the value of a company is,” says Mr Carrett.
“Investors disagree and they argue; capitalism
can be messy and it’s not perfect but that’s what
makes the market – when you have buyers and
sellers. If you don’t have enough people deciding
the value of a company, at a fundamental level
things can be mispriced for a longer period of
time. You can have a sheer wall of money pushing
a stock price in one direction, and that means as
an active investor you have to hold your position
for longer.”
The end result is that effective risk mitigation
and portfolio management are far more difficult.
Diversification is no longer what it used to be, and
the traditional stock-bond mix may no longer be
enough to create a truly diversified portfolio. This
has prompted institutional investors to explore
farther—and at times riskier—territory.
Daring to find difference
With true diversification increasingly found only
beyond standard stock and bond markets, Asian
institutional investors have more appetite for
alternative assets that have more potential to
reduce portfolio correlation and generate the
higher returns needed to meet long-term targets.
A 2016 report from consultancy Cerulli Associates
noted a decline in the number of traditional
investment mandates issued by Asian institutions,
while demand for alternative investment
strategies had increased markedly, particularly in
China, South Korea and Hong Kong. Some South
Korean institutions, the report noted, are targeting
to invest at least 20% of their portfolios in
alternatives before 2020.5
In our survey, 42% of Asian respondents name
increasing use of alternative investments such as
private equity, private debt, commodities and
real estate as one of the top two ways to manage
risk, second only to risk budgeting (46%). More
institutions are investing directly in private firms.
Singapore’s GIC, for example, has snapped up
stakes in an unlisted Philippines food producer
and a Brazilian online sports retailer; along with
Temasek and Malaysia’s Khazanah, it is among
the largest global sovereign fund investors in the
tech sector.
Others, alone or as part of consortia, are
exploring diverse, uncorrelated assets from
infrastructure to forestry. Even Japan’s famously
conservative Government Pension Investment
Fund (GPIF) is getting in on the act; it is aiming to
invest up to 5% of its portfolio in alternatives and
recently put out a call for private equity,
infrastructure and real estate investment
managers.
Investors interviewed for this paper are also
steadily exploring new products and asset classes
that are gaining traction in the region. “If you look
at the banks, they have been deleveraging their
portfolios,” says Mr Carrett of FWD. “Especially in
Europe, banks have been implicitly selling
portfolios of private loans to investors like us and
that’s somewhere where we can get involved.
And of course we do have private equity, but with
so much money going into it the broader market
will struggle, so you have to spend more time
picking the right managers and opportunities.”
Certainly, investments like these suit a longer
investment horizon and a willingness to tolerate
greater liquidity risk. Though for institutional
investors there is a reduced need for immediate
liquidity, they still need to be compensated for
committing assets over the long-term, Mr Woods
says. “In private equity investors are more willing
to be locked up for four to five years, but they
need to be compensated for this by returns. No
investor is willing to be locked up for five years for
a 3% return.”
The drive for diversification, as well as concerns
about correlation, financial and political risks,
may be behind an Asian institutions’ apparent
aversion to passive investment. Just 27% of those

polled in Asia-Pacific said they adopted a mostly
or entirely passive investment approach, versus
30% in EMEA and 52% in North America.
Looking to new products, new markets
Asian investors also seem to see more
diversification opportunities emerging in the
future. Asked to identify the top opportunities for
alpha creation over the next three to five years,
the top two responses were the development of
new products (48%) and the opening of new
markets (38%). The latter was perceived as the top
opportunity in North America and EMEA as well,
selected by 52% and 54% of investors in in the two
regions respectively.
This likely reflects a couple of key regional
differences: one is that Asia-Pacific investors are
more comfortable at home while investors
elsewhere may still see Asia as a largely untapped
market. Asia-Pacific investors seem already well-
versed in their own backyard; 56% say they are
more likely to increase portfolio allocations to high-
growth Asian markets such as China and India,
while only 32% say they are planning to diversify
outside the region to manage risks.
“In terms of diversification, for Asian entities the
first action is typically to go offshore to the extent
that regulations allow,” says Boris Moutier, regional
CIO at insurer AXA Asia. “For many Asia-based
investors, the Asian market is a natural first step for
diversification. But we believe, especially for fixed
income, if you want to access broader investment
opportunities, you should go for global emerging
markets beyond Asia. Within our strategic asset
allocation, we have diversified the credit bucket
with global emerging market bonds, in addition
to domestic Asian corporate bonds.”
Another difference is that in Asia there is more
room for growth in investment products,
particularly in closed markets such as China. Due
to a combination of market forces and regulatory
reluctance many products—active and passive—
have been slow to gain traction in the region. By
mid-2015 Asia accounted for less than 8% of
hedge fund AUM, for example, and leveraged/
inverse ETFs were only approved in Hong Kong last
year. No Asian market has yet approved the
distribution of actively managed ETFs.
This leaves room to grow, and more use is being
made of derivative products as a means both to
Risk budgeting
Increasing use of alternative investments
Currency hedging
Diversification of traditional asset classes
Hedging with options
Volatility hedging
Managing portfolio risks
46
42
40
33
30
11
New products
New markets
Increased focus on factors
Regulation arbitrage opportunities
New/advanced technology solutions/tools
Limited opportunities
Don’t know
Opportunities for alpha creation over the next 3-5 years
48
38
36
34
23
10
1

hedge risks and enhance yield. “Not all markets
in Asia are equipped with efficient derivative
markets but hedging with derivatives is typically a
strategy we use to mitigate volatility,” says Mr
Moutier. “We also use them for yield enhancement
to efficiently replicate the returns of a cash asset.
For example, credit default swaps are used to
gain credit exposure akin to corporate bonds.”
Mr Carrett of FWD agrees: “Derivatives are one
area where we can be thoughtful and make
money.”
In the near future, burgeoning demand and
the region’s continued robust growth will also
continue to broaden the pool of products linked
to alternative assets. Take infrastructure: the Asian
Development Bank estimates Asia’s infrastructure
needs will reach US$26 trillion through 2030,6
much
of which will be funded through private sources,
presenting a significant opportunity to achieve
low correlations and long-term returns. Innovations
in ESG investment are also emerging in markets
like Australia, a leader in green and social debt
issuance, to meet rising demand for sustainable
assets – a phenomenon explored in the next
section.

Impact of regulatory change
% respondents, two choices
Provisions for post trade compliance
Provisions for investor protection covering the
entire lifecycle of investment products and services
Provisions for pre and post trade transparency
Provisions for internal risk review
Provision of policies to supervise new
technology/technological disruptors
Don't know
57
53
50
27
13
1
The increasing emphasis on regulation at the
global level and the pace of change in the
region’s diverse patchwork of regulatory
regimes make it no surprise that regulation is
reshaping the investment process. Asian
institutional investors see regulation having
the biggest effect on provisions for post-
trade compliance (selected by 57% as one
of the top two areas being impacted by
regulation) and provisions for investor
protection covering the entire lifecycle of
products and services (53%).
This emphasis is likely to increase further
given recent regulatory activity in this area.
Hong Kong, for example, has launched
consultations on enhancements to financial
dispute resolution practices that will
significantly boost the ability of investors to
make claims, while Singapore recently
strengthened safeguards for retail investors.
The biggest short-term headache
associated with regulation for Asian
institutionalinvestorsismitigatingcompliance
issues, chosen as a concern by 51% of those
surveyed. This is in line with research showing
that compliance is demanding a greater
portionofinstitutions’financial,technological
and human resources. A recent study in
Japan, for example, showed fund managers
typically allocate up to 10% of total expenses
to regulatory compliance and that most
expect this amount to rise further.7
Mispricing of risk is the second most
immediate regulation-related concern,
chosen by 48% of respondents. This may
reflect the reality that some of the most
ambitious regulatory initiatives currently
emerging globally, such as the European
Union’s Markets in Financial Instruments
Directive II (MiFID II), will have major
implications for the ways institutions account
for and manage risk and for pre and post-
trade transparency.
One thing is clear: post-crisis prudential
rules have increased the focus on the impact
of short-term events on portfolio valuations.
“Short-termism is largely a reflection of the
way books are accounted,” says Mr Woods
of Credit Suisse. “For many years it was a
process of accrual and books were
managed over a much longer time horizon.
If you had a bond it was booked at par at the
beginning and at par at the end… now there
is much more focus on volatility and the PL
because of the requirement to mark-to-
market.”
Rolling with regulation

A rising tide
Institutional investors in Asia have generally been
seen as lagging those in other regions in terms of
adopting ESG investment principles or targets. A
report by the Global Sustainable Investment
Alliance found sustainable and responsible
investments accounted for just 0.8% of managed
assets in Asia in 2016 (excluding Australia and
Japan), unchanged from 2014 and compared to
52.6% in Europe and 21.6% in the United States.8
This looks set to change. The same report found
sustainability-themed investments are growing
across the region at 73% annually, helped by the
increasing interest in green finance in its largest
economy, China. Sustainable assets in China
swelled from US$450m in 2014 to almost US$3bn
last year as the country pursues a cleaner energy
policy.
Our survey also points to ESG being a rising
regional force. Almost two-thirds of Asian investors
polled (62%) expect to increase exposure to ESG
or principle-based investments over the next
three years, and 22% expect to boost exposure in
the next 12 months. Only 12% have no plans at all
to increase investments of this type. This in line with
views in North America and EMEA, indicating a
degree of convergence in the ESG outlook.
The region’s largest investors are also leading
the sustainability charge. Japan’s GPIF has
established an ESG division, and sustainability is a
chief consideration for Singapore’s Temasek,
according to Mr Ewing-Chow.
“Temasek considers environmental, social and
governance factors when we make decisions as
an investor, asset owner and shareholder,” he
says. “We encourage companies, including our
own portfolio companies, to adopt responsible
and sustainable practices in their businesses,
operations and supply chains.”
Mr Woods of Credit Suisse sees the confluence
of demand for sustainable investing from multiple
stakeholders having an impact. “We take social
impact investing very seriously, partly because
investors are demanding it and also because
shareholders and activist shareholders are
demanding it, whether it is embedded as a
requirement or as a specific social impact fund,”
he says.
Seeking a sustainable future
3
Increasing exposure to ESG or principle-based investments
% respondents
Yes, increase it in the next 1 to 3 years
Yes, increase it in the next 0-12 months
No intention to increase level of ESG or principle based investments
Don’t know
41
22
17
12
9
1%

Navigating a new world of ESG investment
While overall trends are positive, there are also
indications of duration-related tensions in
strategies towards sustainable assets. Among
Asian investors polled, 87% say changing
demographics are at least to some extent causing
them to shorten ESG holding/investment periods;
85% say the same of technological disruption;
and 78% the same about climate change
concerns.
As many sustainable assets—for example,
clean energy installations, or green buildings and
transportation networks—are built and designed
to deliver over the longer-term, this points to a
degree of concern about the ability of these
assets to meet long-term goals. Investors may be
rightly worried, for example, about demographic
decline affecting the financial viability of an
environmentally friendly, urban light rail system,
while seasonal variations brought about by
climate change could threaten the productivity
of wind and solar farms.
A lack of consensus on what exactly constitutes
sustainable investing could also be playing a part.
“All asset owners I speak to say they are supportive
of ESG; the only challenge is the implementation,”
says Mr Wong. “There are some big funds that
give specific ESG mandates, but it’s not as simple
as it looks as everybody uses different
measurements. For example, is it good to
outsource or bad? If you are outsourcing, is it okay
to outsource to Vietnam? China? Russia?
“However, in the long run, ESG investing should
deliver better returns as it won’t have a negative
impact on your reputation, and if you’re following
sustainability principles you won’t be fined by a
government for making an environmentally
damaging investment.”
With demand for sustainable assets on the rise,
there has been a wellspring of innovation in
sustainability-themed products that will support
the sector’s further growth while simultaneously
addressing various investor needs in terms of time
horizons, yield and risk tolerance. Vehicles have
emerged to channel funds into everything from
clean water to sustainable forests. China has
swiftly emerged as the world’s biggest green
bond market. In Australia, social impact bonds—a
relatively untested asset class in which the
proceeds are used to fund social goals or
projects—have met with strong appetite from
institutional investors. With both regulators and
investors pushing for more ESG adoption and
disclosure, this field will be even more vibrant in
the years ahead.
The question is to what extent the region’s
institutional investors will be able to seize these
opportunities while managing their other
obligations, as well as the short-term risks and
long-term forces likely to put even the most
meticulously-planned strategies to the test.
As FWD’s Mr Carrett says, “As investors, we can
generate returns by diversifying sources of alpha
and making sure bets are not highly correlated.”
“It’s not easy – but you hope that some of your
bets are paying off while others will pay off in the
future.”

Appendix:
Survey
results
Percentages may not
add to 100% owing to
rounding or the ability
of respondents to
choose multiple
responses.
Non-c-suite
C-suite
A. Which of the following best describes your title?
Please select one.
52%
48%
$1bn-$5bn
$5bn or more
B. What are your organisation's global assets under management in US dollars?
Please select one.
64%
37%

Commercial banks
Insurance companies
Pension fund
Endowment fund
Corporate treasury fund
C. Which of the following most closely describes the organisation that you currently work for?
Please select one.
28%
26%
21%
15%
11%
Investment management
General management
Business development
Finance
Strategy
Other
D. What is your main functional role?
Please select one.
31%
21%
21%
15%
13%
1%

Share responsibility with others
Personally responsible
Advise, but not personally responsible
E. To what extent are you responsible for making your company’s investments decisions?
Please select one.
66%
32%
3%
Market volatility
Reputational risk
Short term requirements
Global economic outlook
Regulatory change
Lack of staff incentives
Governance rules
Media influence on decision makers
Silos within the organisation
35%
29%
27%
27%
23%
17%
15%
15%
14%
1. What do you consider to be the biggest impediment to lengthening the investment horizon?
Please select up to two.

2. What aspects of the investment process do you believe to be most impacted by regulatory change?
Provisions for post trade compliance
Provisions for investor protection covering the entire lifecycle of investment products and services
Provisions for pre and post trade transparency
Provisions for internal risk review
Provision of policies to supervise new technology/technological disruptors
Don’t know
57%
53%
50%
27%
13%
1%
3. Given the changing global regulatory environment, where do you think opportunities for alpha
creation will arise over the next 3-5 years?
The development of new products
The opening of new markets
Through an increased focus on factors
Differentials in regulation across jurisdictions increasing arbitrage opportunities
Through new/advanced technology solutions/tools
There will be limited opportunity for alpha creation over next 3-5 years
Don’t know
48%
38%
36%
34%
23%
10%
1%

4. What are your short-term concerns around regulatory change?
66%
32%
2%
Mitigating compliance issues
Mispricing of risk
Difficulties in the re-allocation of internal resources
Competing objectives
Disjointed regulation with material impact on returns
None of the above
51%
48%
38%
33%
26%
3%
Fiduciary responsibility
Principles/social objectives
Long-term performance
Short-term performance
Reputational risk
28%
27%
21%
17%
9%
5. What drives your portfolio monitoring?
Please select one.

6. To what extent have the following trends caused you to shorten your average hold/investment
period for ESG investments? - Changing demographics
Moderate impact
Some impact
Significant impact
Little impact
No impact at all
Don’t know
40%
32%
15%
10%
2%
2%
period for ESG investments? - Growing incidence of technological disruption
Moderate impact
Some impact
Little impact
Significant impact
No impact at all
39%
36%
13%
10%
3%

Some impact
Moderate impact
Little impact
Significant impact
No impact at all
Don’t know
34%
27%
19%
18%
3%
1%
period for ESG investments? - Growing concerns around climate change
66%
32%
2%
9. Given the changing demographic profile of institutional investors and changing governance
rules within institutional investor funds, do you expect to alter your exposure to ESG or principle
based investments? Please select one.
66%
32%
2%
Yes, increase it in the next 0-12 months
No intention to increase level of ESG or principle based investments
Don’t know
41%
22%
17%
12%
9%
1%

10. Which information sources do you rely upon most in helping you to develop your asset
allocation strategy?
Please select two.
66%
32%
2%
Company reports and financial statements
Direct personal contact (e.g., Investor meetings, roadshows)
External advisory services
General information (general news media, Website based information)
Private online financial communities/groups
Colleagues
Social media (e.g., Twitter, LinkedIn, Facebook)
Other investors
57%
57%
21%
21%
19%
13%
8%
7%
11. What do you consider the biggest risk to achieve long-term targets given longer term trends like
climate change and technological disruption?
Correlation risk
Non-financial risks (e.g., geo-political risk)
Liquidity risk
Short-term volatility
Capital loss
50%
47%
42%
41%
21%

12. When it comes to managing risks, how do you do this?
Risk budgeting
Increasing use of alternative investments (e.g., private equity, private debt, commodities, and real estate)
Currency hedging
Diversification of traditional asset classes
Hedging with options
Volatility hedging
46%
42%
40%
33%
30%
11%
13. What best describes your global equity exposure?
Please select one.
66%
32%
2%
Split between active and passive
Mostly passive
Entirely passive
Mostly active
Entirely active
Does not apply
Don’t know
37%
25%
19%
11%
6%
2%
2%

14. Given the decline in global fixed income yields and changing governance rules in response to
regulatory and technological changes, have you taken on a more active investment approach?
Please select one.
66%
32%
2%
It is equally split between active and passive
No, it is mostly passive
Yes, it is now a mostly active approach with some passive elements
Yes, it is now an entirely active approach
No, it is entirely passive
Don’t know
Does not apply
40%
21%
16%
14%
6%
4%
1%
No, not taking any short term actions
Yes, sometimes
Yes, frequently
Don’t know
47%
28%
24%
1%
15. Is the search for yield leading you to take short-term actions such as increasing portfolio
turnover despite the increased riskiness of such actions?
Please select one.
66%
32%
2%

16. In light of low yields, worsening demographics in the G-7 markets (the US, Canada, France,
Germany, Italy, Japan and the United Kingdom) and the need to generate alpha, have you
adjusted your average holding period for your portfolio to be shorter or longer? Please select one.
No I’ve not adjusted my average holding period
Yes I’ve adjusted my average holding period to be somewhat shorter
Yes I’ve adjusted my average holding period to be much shorter
Yes I’ve adjusted my average holding period to be somewhat longer
Yes I’ve adjusted my average holding period to be much longer
Don’t know
Does not apply
42%
31%
9%
8%
7%
4%
1%
17. Have you changed the process you use to determine your return target in response to
short-term pressure?
Please select one.
Yes, I have become more focused on meeting my longer-term objectives
No I have not changed the process to determine my return targets
Yes, I have become more short-termist
Don’t know
Doesn’t apply
39%
29%
26%
5%
1%

18. What do you believe to be the main concerns of institutional investors in your region?
Please select two.
Financial stability risks
The economic cycle
Mispricing of risk
Market volatility
Portfolio diversification
Geopolitical uncertainty (e.g. North Korea, China/US relations)
Corporate governance
Inflation
43%
40%
30%
27%
21%
17%
15%
8%
No, a change in financial regulations has not led me to reallocate away from or towards a particular asset class
Yes, away from a particular asset class
Yes, toward a particular asset class
Don’t know
Doesn’t apply
46%
23%
22%
9%
1%
19. Has a change in financial regulations led you to actively reallocate your portfolio away from or
towards a particular asset class?
66%
32%
2%

More likely
Less likely because of the need to manage risk and therefore diversify my portfolio outside the Asia-Pacific region
Don’t know
56%
32%
13%
20. Given that the Asia-Pacific region is forecasted to continue to have higher growth rates than
EMEA or North America, are you more or less likely to increase your portfolio allocations to the high
growth rate countries in your region (e.g., the Philippines, Cambodia, China, India)?
66%
32%
2%
21. Which asset types will you look to move into?
Equities
Bonds and other fixed income
Commodities
Alternatives (e.g., Private Equity, private debt, real estate)
Funds
Cash
50%
41%
39%
34%
19%
9%

22. Given longer-term demographic trends reflected by an aging population in some countries
and a growing Islamic population in other countries in the Asia-Pacific region, have you
implemented or are you planning to implement principle based investment (e.g., ESG, Sharia
compliant investing) into your investment process?
Yes, I plan to implement this in the longer-term but do not see it as a strategic issue right now
Yes, I already have this as part of my portfolio allocation strategy
No, I do not plan to implement this into my portfolio allocation strategy
Don’t Know
Doesn’t apply
39%
36%
15%
10%
1%

Whilst every effort has been taken to verify the accuracy of this information, neither The Economist Intelligence Unit Ltd. nor the sponsor of this report can accept any
responsibility or liability for reliance by any person on this report or any of the information, opinions or conclusions set out in the report.
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