More than half (52%) of all institutional investors around the world plan to rethink over the next decade the traditional way they’ve always allocated the assets under their control, according to the results of a survey by Pyramis Global Advisors.
As the global economy downshifted since the financial crisis began in 2008, 41% of institutional investors surveyed said they have had to become more “tactical” and opportunistic in their investment decisions. Even with the new aggressive stance, large portions of those surveyed—29% in the U.S., 40% in Canada and 51% in Europe, for example—said they doubted they will achieve their return assumptions. (Interestingly, the survey revealed that global institutions seek to achieve median annual rates of return between 3% and 8% to cover costs and liabilities. Despite major changes in capital markets over the past several years, this required return rate has not changed significantly in four years.)
In an effort to boost those returns, respondents named several methods their new tactical approach would employ, including:
• conducting more frequent internal risk reviews (48%);
• streamlining decision making via pre-approved asset allocations (34%); and
• emphasizing investment committee education (26%).
The survey also showed that the top concern among global institutions is the low-return environment, with 31% of respondents citing that as a top concern. In Europe, aside from the United Kingdom, that percentage grew to 57%.
“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.”
Demonstrating this new rethinking process, large percentages of global respondents—29% 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”, such as emerging markets securities. Additionally, 38% of respondents expect to change their investment mix to add illiquid alternative investments, such as private equity; and 22% expect to add liquid alternative strategies, like hedge funds.
The survey also looked into the use of derivatives, which are seen as a necessary tool to new thinking in asset allocation. The use of derivatives was relatively high at 64% globally, with 43% of survey respondents reporting that they used derivatives to adjust their market exposure, and 47% said they used them for “downside protection” or “tail risk.”
Looking to the future, the survey found that 52% of respondents said, given the trends in today’s highly correlated markets, that past approaches to asset allocation will not be effective within the next 10 years. Just 19% expect traditional asset mixes to continue to be a winning strategy.
Among those respondents who said they expect an entirely new asset allocation model to prevail in 10 years, almost one-third (32%) of them said they will shift significantly to both alternative asset classes or factor-based strategies (where allocation is based on specific risks). Another 11% said they would shift significantly to absolute return strategies.
The respondents to the survey of pension plans and others institutional investors from Europe, Asia and North America oversee more than $5 trillion in assets, the survey noted. The annual survey, Shortening the Time Horizon: the
Pyramis Global Advisors is an institutional asset management subsidiary of Fidelity Investments. The firm is based in Smithfield, R.I., held assets under management of more than $180 billion at the end of June.
