GLOBAL - Global financial institutions are planning to expand their allocation to Asian asset classes to get better returns and improved diversification, according to new research.

However, the Economist Intelligence Unit survey entitled From West to East: Gauging Institutional Investor Attitudes to Asia says that concerns about transparency and regulatory rigour across Asia are still commonly cited as barriers to investment in the region.

The survey was carried out this February and covered 109 financial services professionals in Europe and Asia, just over half the respondents being based in Western Europe.

Pension and retirement funds accounted for 12% of respondents, while 14% were insurance companies and 2% were foundations and endowments. About half the respondents represented institutions with global assets in excess of US$50bn (€37bn).

The survey found that China and India should attract the most significant new capital flows over the next year, with 57% of European respondents planning to increase their allocation to the former, and 47% to the latter. The next most popular region was the ASEAN nations (Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam) where 44% of European respondents planned to up their allocations. And 27% said they would  invest  more money in South Korea.

However, only 8%  of European respondents planned to increase their holdings in Japan.

When broken down by type of institution, China and India were level pegging in terms of popularity, with 46% of pension funds and insurance companies planning to increase their allocation to each specific country. The ASEAN nations were the next popular, with 42% of pension and insurance funds planning to increase investment there, followed by Australia and South Korea on 29%.

Most respondents said that investing in asset classes in Asia such as equities, real estate and alternative assets is riskier than investing in similar assets in Western markets. The exceptions are bonds and government debt, where a majority believes that the risks are equivalent or lower. Some 54% of all respondents also agree that Asia is more prone to asset price bubbles than the West.

However, most respondents believe that returns are greater across all asset classes in Asia than for equivalent investments in Western markets, except for government debt.
The most significant barrier to further institutional investment in Asian markets is a lack of knowledge and expertise, along with concerns about political stability, said 32% of all respondents.

But of those respondents who cited a lack of knowledge as a disincentive, 46% said they were increasing their allocation to China, and 31% to India. The survey's authors said this suggests that some institutions could be raising their exposure to Asian markets without having the appropriate knowledge and expertise in place.

Despite seeing significant opportunities, however, the survey shows that international portfolio investors continue to worry about a lack of transparency in Asia. Transparency was seen as the main barrier to the development of financial centres in the region by 61% of all respondents. And the quality and rigour of regulatory infrastructure in Asia follow close behind in their list of concerns.