Asia Summit 2015 - The View from Institutional Investors: Where Will Returns Come From?

Panel Composition and Scope

• The session featured five institutional investors managing a combined $2+ trillion in assets, focusing on the conflict between a low-interest-rate environment and the mandate to deliver superior risk-adjusted returns.
• Moderated by Jonathan Nelson (CEO, Providence Equity Partners), the discussion prioritized separating macroeconomic headlines from specific investment execution strategies.

China Market Analysis and Divergent Views

• Adrienne (NZ Super, $18B AUM): Maintains a strategic overweight to China (~12% of portfolio, double MSCI weights) based on long-term convergence theses; views recent volatility as a standard path that creates entry opportunities.
• Hiromichi Mizumo (GPIF, $1.2T AUM): Expresses skepticism regarding Chinese economic data transparency, suggesting official 6% growth figures may mask a 4% reality; notes that state intervention during crises has diminished confidence in market mechanisms.
• Jeffrey Subakit (GIC, ~$320B AUM): Argues that Chinese index performance has historically failed to reflect underlying economic growth due to prolonged drawdowns, necessitating active stock-picking over passive indexing.
• Gordon Fyfe (BCIMC, ~$130B AUM): Highlights a shift from public index exposure to private assets in China, targeting niche consumer businesses that require capital access and operational efficiency guidance.

Strategic Shifts in Asset Allocation and Return Drivers

• Decline of Passive Beta: Panelists unanimously agree that passive index investing in emerging and developed markets is insufficient for generating alpha in a low-growth environment; future returns will depend on skill-based security selection.
• Fees and Cost Sensitivity: Gordon Fyfe emphasizes that fee structures (e.g., 2-and-20) become critical cost centers in low-return environments, requiring rigorous justification of net performance.
• Alternative Asset Opportunities:
  • BCIMC is significantly underweight private assets (0-2% in real estate/infrastructure) and views the current China downturn as a catalyst to increase exposure to private companies with niche advantages.
  • NZ Super identifies "diversification" as its highest confidence factor for returns, followed by market mispricing, with "pure skill" allocated to only two managers.
• New Geographic Frontiers: Gordon Fyfe identifies Africa as a high-potential, long-term growth region, specifically citing Nigeria's demographic surge, though noting that reputation risk and corruption concerns remain barriers to entry.

Manager Selection vs. Asset Allocation Dynamics

• The Active Manager Paradox: Adrian (NZ Super) admits that while asset allocation dictates major returns, "skill" (the ability to pick active managers) is the lowest confidence factor; he rejects blind strategic asset allocation for sectors like private equity.
• Internal vs. External Management: GIC relies heavily on internal teams for tactical shifts and market timing, viewing external managers as often providing "beta plus" rather than genuine alpha.
• Performance Evaluation Mismatch: Hiromichi Mizumo highlights a structural conflict where pension funds are required to deliver absolute returns but are evaluated on relative alpha, creating friction with manager mandates.

Market Volatility, Valuation, and Counter-Cyclical Strategy

• Relative Value Plays: Adrian cites emerging markets trading 30-40% below "true worth" and Europe at 20-30%, advocating for capital allocation scaled to the size of the value gap rather than region.
• Mark-to-Market Challenges: Panelists note that increasing transparency in private asset valuation (audited, mark-to-market) reduces the "liquidity premium" illusion but prevents the hiding of losses; this transparency is viewed as a fiduciary necessity.
• Crisis as Opportunity: The consensus is that market downturns are beneficial for long-term capital, allowing funds to access assets at distressed prices, provided boards and clients are educated to tolerate short-term volatility.
• Regulatory Plays: GIC is exploring "smart beta" strategies and derivative-based liquidity provision (e.g., mezzanine debt, catastrophe bonds) to leverage long-duration liabilities.

Forward-Looking Statements

• Operational Efficiency: Future returns in China will rely on private firms leveraging foreign capital for operational know-how rather than simple capital infusion.
• Africa Expansion: BCIMC anticipates a multi-year process to establish a presence in Africa, focusing on mitigating reputation risk through rigorous partner selection.
• India Caution: Gordon Fyfe remains wary of India due to valuations already pricing in growth; investment will only increase upon visible execution of economic reforms.