Institutional Investors Considering New Allocations

Market volatility and low interest rates led 41% of respondents to say they became more “tactical,” or opportunistic, in their investment decisions. Nevertheless, 36% of these investors believe they will not achieve their return assumptions (ranging from 29% in the U.S., 40% in Canada and 51% in Europe).

The survey also found 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 remained significantly unchanged in four years.

Global institutions’ top concern is low-return environment (31%), up from 25% at the onset of the financial crisis in 2008, the survey revealed.

Forty-one percent of schemes expect to use a more dynamic or opportunistic approach to allocation portfolio assets to boost returns. To do this, pension managers say they must conduct more frequent internal risk reviews (48%); streamline decisionmaking via preapproved asset allocations (34%); and emphasize investment committee education (26%).

Institutions are seeking excess returns, assets with low correlations to public markets and assets with different risk and return profiles. Eight in 10 pension managers believe picking the right market or region will be the primary source of future returns. More than one-quarter (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 equity and debts.

Alternative investments are also gaining popularity; 38% of respondents expect to change their investment mix to add illiquid alternatives (such as private equity), while 22% expect to add liquid alternatives (such as hedge funds).

The use of derivatives is relatively high (64%) globally. Forty-three percent report using derivatives to adjust market (beta) exposure; 47% said they used them for downside protection or tail risk.

New Models to Join LDI 

Some respondents are questioning the long-held beliefs in their traditional and liability-driven investing (LDI) asset allocation models, the survey found. 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, such as liability-driven investing (LDI), while 19% expect traditional asset mixes to prevail.

Among pensions managers—mainly U.S. corporate, Japan and U.K. pensions schemes—LDI figured prominently. More than half (51%) of the investors globally said they were using an LDI strategy.

Among the institutions expecting entirely new asset allocation models to prevail in the next decade, nearly one-third (32%) said they will shift significantly to both alternative asset classes or factor-based strategies. Eleven percent believe they will shift significantly to absolute return strategies. In total, 43% of institutions worldwide are considering some new model.

The 2012 Pyramis Global Institutional Investor survey, “Shortening the Time Horizon,” was conducted online during June and July 2012. Respondents included 632 investors in 16 countries (193 U.S. 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 totaled more than $5 trillion USD, collectively.