Survey Shows Continued Shift Toward Emerging Markets and Alts

A study by Deutsche Bank has revealed an anticipated asset allocation shift as asset owners migrate away from US equities into other asset classes.

(November 8, 2010) — A new survey by Deutsche Bank points to a continued desire to focus on emerging markets and alternative strategies, such as long-short equity, macro funds and special situations, as opposed to US equity.

“I think it’s one of the first times we’ve gotten proof of institutional investors leaving US equities, with data that confirms that trend,” commented an industry observer. “Here, we see proof that the money is going toward alternatives and emerging markets. The realization has come from the fact that strategic diversification alone is not sufficient to protect in downturns.”

The report — compiled by Deutsche Bank Pension Strategies & Solutions — discovered that hedge funds have emerged as one of the most popular areas for future investment, particularly among public and corporate defined benefit plans. While 46% of respondents anticipate increases to emerging markets and 41% for hedge funds over the next 12 months, 44% said they would like to decrease their exposure to US large-cap equities. Meanwhile, 38% said they would like to reduce exposure to small-cap equities.

Furthermore, the firm’s November 2010 report showed a continued effort to reduce surplus volatility. Respondents noted that interest rates would have to increase 200 basis points to make liability-driven investment strategies feasible.

In terms of tail risk hedging, the most frequent dialogue Deutsche Bank has had with institutional investors, the report said the results reflect a greater awareness of risks and risk management. While only 35% of respondents reported not looking at tail risk, 51% indicated that looking ahead, equity tail risk hedging will be a premier focus. “A large number of tail risk hedges will be placed this year to protect against black-swan type of events,” the industry observer stated.

The study was compiled by surveying 103 institutional investors in the US pension, endowment, and foundation community, or 20% of market participants, with assets under management of $1.2 trillion. Starting in mid‐September, the firm surveyed chief investment officers and other senior investment officers at these institutions to gain insight into the decisions that will drive pension, endowment, and foundation investing in the end of 2010 and through 2011. Thirty-nine percent of respondents were from corporate pension plans, 27% public pension plans, 17% endowments, 12% foundations and the remainder from other institutions.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href=''></a>; 646-308-2742