SSgA Survey: Institutional Investors Expecting the Worst

In total, 71% of respondents believe a significant tail risk event is “highly likely” or “likely” to occur over the next year.

(October 1, 2012) — The worst is coming—or so believes the majority of institutional investors surveyed for State Street Global Advisors’ (SSgA) latest research. 

Of the 310 respondents from Western Europe and North America, 71% told the Economist Intelligence Unit, which conducted the survey, that they believed a significant tail risk event is “highly likely” or “likely” to occur in the next 12 months. The study shows that the Eurozone crisis, prospect of global or European recession and, China’s slowing development are among the chief concerns.

 “The report’s findings show that tail risk events are nearly always underestimated, but that given the occurrence of a number of these events in recent years, sensitivity amongst institutional investors to them has increased,” said Niall O’Leary, managing director and head of EMEA portfolio strategy at SSgA, in a statement. “However, the research also shows that the benefits of diversification as a tail risk mitigation approach are unclear and investors are not entirely confident that they are sufficiently protected from the next event. Adoption of tail-risk mitigation strategies has been slow, although a large majority of investors now see managing this issue as an integral part of a comprehensive investment plan.” 

Just 20% of respondents reported being “very confident” that they have some form of protection in place to mitigate the impact of the next serious tail risk event, with 61% feeling “somewhat confident” that they did. However, 73% of institutional investors said they’re better prepared for the next cataclysm than they were before the start of the financial crisis, thanks to changes in their strategic asset allocation. 

“The market is still very focused on the possibility of down-side events and methods to protect against them. This increased awareness and the willingness to guard against these events are encouraging, but the pace of adopting tail-risk strategies has been slow,” O’Leary concluded. “Investors are still trying to decide which methods are best in terms of effectiveness and value, and some concern persists that the tools currently available to investors are not adequate enough.”