Asian Institutions Outsource

Terry Flanagan

Asian institutional investors increase their call upon external managers; both pensions and beyond.

U.S. state pensions have long used the outsourced chief investment officer model to manage large assets—often borrowing top talent from their endowments and foundation peers.

“There just isn’t the same competitive salary for top talent to manage a state pension plan, often leading to the outsourced model,” said an unnamed institutional investor. “Many pension managers don’t have as much investment acumen as those from the endowments and foundations world.”

A similar trend is occurring in Asia. Institutions in the region held $8.6 trillion in investable assets by December 2010, a 13.2% rise from the end of 2009, according to Cerulli Associates. By the end of 2011, the firm predicted nearly $1 trillion will be accessible to external managers, which represents 11.4% of the region’s total investable assets.

“The extent of outsourcing varies among types of institutions. For example, Asian state pension funds’ proportion of outsourced assets is growing faster than average, having expanded to 18.7% in 2010 from 10.8% in 2006,” said Ken Yap, head of Asia Pacific research at Cerulli.

“On the other hand, institutions like corporate and commercial banks and insurance firms still prefer to manage much of their money internally,” Yap said.

Although state pensions’ outsourcing has been growing relatively fast, pension funds are no longer the most attractive source of institutional assets for external managers.

A recent Cerulli survey showed that, central banks and quasi-government organizations have replaced pensions as the biggest source of institutional assets. Yet in 2009, the firm reported that external asset managers regarded pensions as the most significant source of institutional assets in Asia ex-Japan.

Indeed, Asian sovereign wealth funds comprise 13.5 billion of assets, of the total six trillion estimated to be outstanding, according to Pensions & Investments.

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