On 1 June, WTW’s Asian Investments team held its first in-person Investments Ideas Exchange (IiX) in Hong Kong since the onset of the global pandemic. 54 asset owners joined us, representing 35 diverse organisations across Greater China, including insurers, government-linked entities, corporate pensions, endowments, and private wealth.
To view our highlights from the event, please watch the video below.
On June 1 2023, the Asia Investments team held their Investments Ideas Exchange event where over 50 asset owners came to hear our insights from our panelists and speakers.
Our first panel discussion was focused on a topic of increasing importance for asset owners in Asia – sustainable investment, and specifically, how asset owners in Asia should respond to a transition to a low-carbon economy. In fact, during a live poll taken during the session, 81% of respondents noted they believe sustainable investment is somewhat important to their portfolio, while the remaining 19% believe it to be very important.
Professor Lapman Lee (APAC Climate and ESG Insurance Consulting and Technology Practice Leader, WTW) moderated the insightful sustainable investment discussion between panellists Chi Zhang (Head of Sustainable Investment, AIA), Fanda Ho (Chief Investment Office, AIA), and Jason Zeall (Associate Director, Investments, WTW). The panel agreed that while sustainable investment was once considered a niche form of investing; it has now entered the mainstream. Some ways that asset owners in Asia have considered sustainability in their portfolios are exclusion and ESG integration. Specific to climate, asset owners are measuring carbon emissions in line with their net zero commitments, while also considering forward-looking climate risks, such as transition risk. Jason Zeall noted that WTW espouses a more holistic way to manage climate in a portfolio beyond simply measuring climate emissions; in fact, he notes that “forward-looking climate transition risk has little to no correlation to backward-looking carbon emissions”, i.e. carbon emissions are a poor proxy for climate-related risk in a portfolio.
While there are a multitude of ways by which asset owners can consider / implement sustainable investment, it was mentioned that certain more extreme measures, such as “total exclusion [of unsustainable companies] may not be healthy to the whole industry”. Rather, asset owners should consider their roles as active owners and seek to engage with their underlying investee companies on improving their ESG practices, such as encouraging them to implement sound transition plans.
Up next was the timely topic of China’s reopening and its implications for asset owners. Andrew Zurawski (Chief Economist, Investments, Asia, WTW) first set the scene by discussing current and emerging trends in China and Asia’s macroeconomic landscape. Generally, WTW expects slowdowns in GDP growth in the US and Europe in 2023, while Asia’s outlook is more favourable. Nonetheless, the range of outcomes amongst Asian economies can be divergent – for example, Andrew noted that while Japan’s growth is expected to be relatively strong, Australia’s growth is likely to slow down. On China specifically, WTW believes that while there are positive trends observed in the consumption sector, key risks remain within China’s property sector given the headwind of a rapidly aging population.
The sentiment expressed by Andrew was carried over into Jacky Cheng’s (Associate Director, Investments, WTW) fireside chat with Vincent Au (Managing Director, Alps Advisory). Several key investment trends were discussed, including China’s reopening, an apparent movement towards local brands amongst consumers, as well as investment opportunities. While geopolitical tensions involving China are apparent, it is difficult to eliminate exposure to China – especially for diversified portfolios. Indeed, many global companies have significant businesses in China, while supply chains continue to be very integrated. Still, asset owners should consider what price is sensible to enter into the Chinese markets, what return premium should be demanded, and whether liquidity needs can be met. In terms of implementing an allocation to China and finding a suitable manager to do so, Jacky Cheng asserted that “having local knowledge is paramount; [asset owners] can’t do without it.”
Our day wrapped up with a lively debate on a classic portfolio construction conundrum – should asset owners utilise the “tried and true” 60/40 portfolio or does a more diversified portfolio work better? Paul Colwell (Senior Director, Head of Portfolio Advisory, Asia, Investments, WTW) moderated the session, which included panellists Keith Yuen (Independent Trustee, MTR Corporation), Richard Chan (Chief Investment and ALM Officer, FTLife), and Raymond Kwong (Director, Investments, WTW). The panel appeared in agreement with that “having a 60/40 SAA is a good starting point”, especially as a default for DC scheme members who may face “too many choices”. That said, “there is no magic number”, and “the right portfolio must factor in the needs of the asset owner, as well as their constraints”.
Following this, asset owners were encouraged to see “bonds and equities as a continuum”. Most investments can be considered by evaluating their equity and bond like characteristics, as this will help with a better understanding of their true risk/return profiles.
When reflecting on last year’s market, where both equities and bonds underperformed, Raymond Kwong highlighted the importance of “avoiding knee-jerk reactions”, as a bias towards action may lead to a long-term drag on performance.
The conversation then turned to take a deeper look at some past data. During the turbulent markets of the last three years, holding a diversified portfolio (beyond simple equity and bonds) would have produced a better outcome. As seen in the graph below, Portfolio A and B, both representing different diversified portfolios, outperformed a simple 60/40 portfolio over different timeframes. Portfolio B, which had a notably higher exposure to alternative assets and private markets, performed the best.
All in all, the panellists agreed that while a diversified portfolio can yield better risk-adjusted results over the medium to long run, choosing between a simple 60/40 vs a diversified portfolio is not an easy choice. There are numerous costs / constraints to consider (e.g. complexity, liquidity constraints, cost of additional resources, and lack of scale), as well as psychological barriers to overcome. Notwithstanding such challenges, Paul Colwell encouraged asset owners to pursue a diversified portfolio as much as possible; and consider finding partners to help with accessing alternative / private markets managers and implementing the portfolio, if needed.
We are grateful to have had the opportunity to host this event, making new acquaintances while reconnecting with old friends. Thank you to all our participants and speakers for engaging with us and one another in conversation on important topics within the investments industry. We hope to see you at our next event – please do stay in touch with us!
