Emerging opportunities

Changes to investment strategies by major institutions could be good news for emerging markets, Henry Quek writes. 

Official institutions are clearly at different stages in terms of how and where they can invest, but it is clear that those with a more flexible investment mandate are recalculating their approach and are looking to new markets and asset classes. New State Street research amongst sovereign wealth funds (SWFs), public pension reserve funds and central banks reveals many are implementing major changes to their investment strategies, and this has huge implications for them in terms of risk, operational efficiency, recruitment and measuring performance. However, it could be very good news for emerging markets.

Faced with a low interest rate environment, they are exploring new markets and asset classes seeking enhanced returns and greater portfolio diversification. One result of this is that 80 per cent plan to increase their exposure to emerging market equities over the next two years. Although many emerging markets have set up their own SWFs, which often invest heavily in their local economies, they are increasingly looking at new opportunities including those in other emerging markets.

Furthermore, some 47 per cent are also looking to invest more in real estate and infrastructure, and some of the most exciting opportunities here can be found in the emerging market world.

These findings should be welcomed by emerging markets because official institutions, when compared to many other investors, take a much longer term view when it comes to setting their investment objectives and are less focused on quarterly returns, for example. This means there is less churn of their investment portfolios and they are very much long-term partners of the companies they invest in. Given the problems some emerging markets have had with high volatility of investor flows, attracting more investment from official institutions is a very positive development.

However, as they look to increase their exposure to emerging markets, official institutions acknowledge they are faced with perhaps a more daunting set of challenges. For example, our survey revealed that 37 per cent believe their biggest investment challenge will be managing volatility in emerging markets, followed by 25 per cent who said it would be dealing with the complexity associated with alternatives.

As their portfolios become more global, it’s perhaps not surprising that 51 per cent believe managing and monitoring the amount of currency risk they take is their key currency related challenge.

Overall, as they look to take advantage of the many long-term opportunities in emerging markets and develop more global and diversified investment portfolios, official institutions realise they face a number of challenges in terms of how they manage risk, data, and improve on their operational efficiency.  

Key to all of this will be ensuring that they continue to attract some of the brightest talent in the investment industry, and this may well mean hiring more people on the ground in the emerging markets they invest in.

Henry Quek is senior managing director and head of official institutions for Asia-Pacific at State Street.