Historic change in asset allocation approach and use of asset classes
SMITHFIELD, RI and HONG KONG, PRC, Oct. 8, 2012 /CNW/ -Fifty-two percent of institutional investors worldwide are rethinking traditional approaches to asset allocation over the next 10 years, according to a Pyramis Global Advisors® survey of pension schemes and other institutions from Europe, Asia and North America. These respondents oversee more than USD$5 trillion in assets.
In recent years, amid market volatility and low interest rates, 41% of respondents said they became more "tactical," or opportunistic, in their investment decisions. Despite that, 36% of these investors believe they will not achieve their return assumptions (ranging from 29% in the U.S. to 40% in Canada and 51% in Europe).
Shortening the Time Horizon, the 2012 Pyramis Global Institutional Investor Survey, also reveals that global institutions require median annual rates of return between 3% and 8% to cover liabilities and, despite major changes in capital markets, this required return has not changed significantly in four years.
The Pyramis survey, now in its tenth year, shows global institutions' top concern is the low return environment (31%), up from 25% at the onset of the financial crisis in 2008. (Fifty-seven percent in Europe ex U.K. cited the low return environment as their top concern.) To navigate this market, 41% of schemes expect to use a more dynamic or tactical (opportunistic) approach to allocating portfolio assets to boost returns. Achieving this, pension managers say they must:
- Conduct more frequent internal risk reviews (48%)
- Streamline decision making via pre-approved asset allocations (34%)
- Emphasize investment committee education (26%)
"In an effort to boost returns, institutions globally will have to accept more risk or different kinds of risk," said Mike Jones, president and CEO of Pyramis. "We found that many institutions are increasing or diversifying their risk and changing the way they execute on investment decisions, while some are completely rethinking long-held beliefs about asset allocation."
Investors targeting excess returns, low correlations and different risk/return profiles
Among other key findings, institutions are seeking excess returns, assets with low correlations to public markets and assets with different risk and return profiles. As such, 8-in-10 pension managers believe picking the right market or region will be the primary source of future returns. Twenty-nine percent in the U.S., 30% in Canada, 33% in Europe and 23% in Asia said they would definitely or likely increase the use of more aggressive "sub asset classes" (e.g., emerging markets equity and debt). Alternative investments are also becoming more popular, as 38% of respondents expect to change their investment mix to add illiquid alternatives (e.g., private equity), while 22% expect to add liquid alternatives (e.g., hedge funds).
More dynamic asset allocation and risk management demands derivative
The survey also explored derivatives, which are required in implementing a more dynamic approach to asset allocation. The use of derivatives was relatively high at 64% globally. Forty-three percent report using derivatives to tactically adjust market (beta) exposure; 47% said they used them for "downside protection" or "tail risk."
"For those who don't have the internal expertise or resources to manage their portfolio more dynamically they're turning to their investment partners," said Derek Young, president of Fidelity's Global Asset Allocation division and vice chairman of Pyramis. "That's why it wasn't surprising that our survey found that in the past two years, one fifth of surveyed U.S. and European institutions had expanded their relationship with outside managers and employed a so-called outsourced CIO."
In future, traditional models, LDI to be joined by new models such as absolute return
Even as some institutions look to broaden outside partnerships, the Pyramis survey found that some respondents are questioning long-held beliefs in the asset allocation models themselves. More than half (52%) noted that with more highly correlated markets, their approach in the past will not be effective in 10 years. When asked what they expect the traditional models to look like a decade from now, 26% said they will shift toward fixed income or immunized strategies (e.g., liability-driven investing or LDI), while 19% expect traditional asset mixes to prevail.
Among pensions managers (mainly U.S. corporate, Japan and U.K. pension schemes), LDI figured prominently. More than half (51%) of the investors globally said they were using an LDI strategy.
Among those institutions expecting entirely new asset allocation models to prevail in 10 years, nearly a third (32%) said they will shift significantly to both alternative asset classes or factor-based strategies (where allocation is based on specific risks). Meanwhile, 11% believe they will shift significantly to absolute return strategies. In total, 43% of institutions around the world are considering some new model.
About the survey
Pyramis Global Advisors conducted a survey of institutional investors during June and July 2012, including 632 investors in 16 countries (193 US corporate pension plans, 109 U.S. government pension plans, 92 Canadian pension plans, 149 European and 89 Asian institutions (including pensions, insurance companies and financial institutions). Assets under management represented by respondents totaled more than $5 trillion USD. The surveys were executed in association with Asset International, Inc., in the U.S., the Canadian Institutional Investment Network in Canada, and the Financial Times in Europe and Asia. Institutional executives responded to an online questionnaire or telephone inquiry. A report on the survey is available at www.pyramis.ca
About Pyramis Global Advisors
Pyramis Global Advisors, a Fidelity Investments company, delivers asset management products and services designed to meet the needs of institutional investors around the world. Pyramis is a multi-asset class manager with extensive experience managing investments for and serving the needs of some of the world's largest corporate and public defined benefit and defined contribution plans, endowments and foundations, insurance companies, and financial institutions. The firm offers traditional long-only and alternative equity, as well as fixed income and real estate debt and REIT investment strategies. As of June 30, 2012, assets under management totaled more than $180 billion USD. Headquartered in Smithfield, RI, USA, Pyramis offices are located in Boston, Toronto, Montreal, London, and Hong Kong.
SOURCE: Pyramis Global Advisors
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