Two of the most vital trends in portfolio management today—the globalization of institutional asset management and the recognition of real assets as a third foundation asset class alongside equities and fixed income—are converging in one of the world’s most dynamic investment destinations, the population centers of emerging Asia. Allocations in the “Big Two Traditionals” of stocks and bonds are evolving, albeit at a measured pace, from home-country concentrations as investors become increasingly desirous of the potentially higher returns and diversification benefits of cross-border investing. Yet despite the incremental globalization, institutional investors remain deeply underweight Asia, home to some of the world’s fastest growing economies (Exhibit 1).
Out of whack: Investors are seriously underweighting Asia, given the size and depth of its financial markets
EXHIBIT 1: MARKET SHARE VS. PORTFOLIO ALLOCATION SHARE*
This strategic portfolio misallocation, which we term The Great Asia Underweight poses a paradox for institutional investors. On the one hand, relatively high economic growth rates, rapid urbanization and the rise of the middle class are themes in the Asia region which together should offer a multitude of investment opportunities over the next few decades. On the other, considering that total global assets under management total upwards of $45 trillion, according to one widely accepted estimate,1 even a marginal rebalancing of 1% or 2% could seriously distort security prices on Emerging Asia financial markets.
Fortunately there is a third way to rebalance global portfolios and access the opportunities: real assets. Positioned to benefit from all the Asia growth themes, demand for hard assets like property and infrastructure provides a strong fundamental backdrop for the generation of relatively attractive total returns. The potential sum of investor flows to the region and into Asia real assets is so substantial that, in response, the values of the assets should rise, even while the supply grows, with new development striving to satisfy both end-user and investor demand. These assets constitute a "pure play" on local growth. They sit in local markets responding directly to local economies, so their returns are lowly correlated to the global financial markets, a potentially attractive advantage in a world of increasingly correlated assets.