(December 11, 2012) — Institutional investors have a laundry list of fears for the next 12 months, according to a survey by financial services firm bfinance.
The biggest perceived risks? Volatility, sovereign debt, and the Euro area crisis, as well as inflation and the risk of a generalized market collapse. “Naturally, such fears lead major asset owners to prefer investment solutions that limit portfolio volatility while providing a hedge against inflation,” bfinance’s report concluded.
“The volatility being presented in the market due largely to sovereign debt issues pervading the investment environment is out of our control,” John Johnson, the interim CIO of Wyoming’s pension fund, told aiCIO early this year. That perceived loss of investing control amid a turbulent market has led the scheme to pursue a more passive investing approach, allocating roughly 70% of its equity to a passive strategy. “That’s the biggest thing we’re doing right now,” Johnson said at the time.
Respondents to bfinance’s survey also voiced a lack of concern about an upturn in long-term rates, while dismissing the scenario of a slowdown in growth in emerging countries. In addition, investors dismissed the possibility of a speculative bubble in the equity markets and debt of these emerging economies, signifying greater levels of investment in the months and years ahead, the firm concluded.
The report describes institutional investors as cautiously optimistic in 2013. With quantitative easing policies implemented by major central banks, most institutional investors (80%) have revised down the performance objectives assigned to their portfolios, while heightening requirements for higher contributions for members and sponsors.
In terms of expected portfolio return assumptions for 2012, 36% of respondents predict 5-6%; 34% cite 6-7%; 15% foresee returns below 5%; 9% say 7-8%, 4% say 8-9%, and a meager 2% predict lofty returns of more than 10%.
The firm’s survey also outlines asset owners’ aims to redesign their bond portfolio strategy. “The survey illustrates how major asset owners are responding to the low interest rates environment and increasing risk with regard to sovereign borrowers by repositioning their fixed income portfolios from sovereign bonds investments into a range of assets delivering higher returns,” the research said. “The movement of bond portfolio diversification, which appeared at the early stage in investing in investment grade credit securities, has since widened to high yield, leveraged loans, loans granted to the real-estate sector, and corporate loans granted by banks. The survey also reveals investors’ growing interest in emerging market debt.”
The survey by bfinance was conducted in October among 54 institutional investors representing nearly US$350 billion of assets. Of the respondents, 75% were based in Europe, 23% in North America, and 2% in the Middle East. Of the European respondents, 30% of participants were based in the UK, 11% in Benelux, and 13% in Nordic countries. Overall, 45% of all participants were corporate pension funds, followed by public pension funds (30%), insurers (6%), and foundations and endowments (4%). Plans with more than $1 billion assets under management accounted for 75% of all participants.
