J.P. Morgan Cites Institutional Investor Trends

August 22, 2011 (PLANSPONSOR.com) - J.P. Morgan said it is seeing many of its clients actively taking advantage of the down markets to rebalance and get back to their target allocations across asset classes.

Institutions in need of reliable income sources are turning to alternative asset classes given the persistently low yield environment with the Federal Reserve keeping interest rates near zero for the next two years.  U.S. firms are increasing their dividends (209 S+P 500 firms raised their dividend last year, more than double the year before) and the average dividend yield over the last 12 months for S+P 500 has been nearly 1.9%, providing an attractive alternative to T-bills.  Institutions are pursuing equity income strategies both domestically and with international stocks.  

Bolstered by the strong fundamentals underpinning emerging markets and the structural strength from supply-constrained commodities, emerging markets increasingly look like an attractive source of yield and return relative to developed markets, the firm reported.  Institutions are looking for more diversified exposure from nimble investment managers who can help to protect against the risks that accompany emerging markets. Investors note that while emerging market valuations have risen, they are still not near extreme levels, suggesting it is still a reasonable entry point.   

Institutions continue to feel pressure to deliver returns that will help to meet obligations and are looking for growth returns.  J.P. Morgan said one way to access this is through exposure to companies positioned at the nexus of evolving consumer trends, particularly technology.  Strategies that target companies increasingly blurring the lines between media, consumption and technology, such as Apple and Amazon, continue to show impressive momentum.  J.P. Morgan is seeing many investors take another look at large cap growth strategies, particularly because valuations for this sector of stocks look attractive on a historical basis.   

As growing world economies like China continue to reduce their reliance on the U.S. dollar, institutional investors are very cognizant of the need to diversify.  J.P. Morgan said it noticed them pursuing international currency income strategies (diversified portfolios of high quality fixed income securities denominated in foreign currencies), emerging market debt, and private equity strategies.   

Thanks to robust emerging markets, supply-constrained commodities should continue to perform strongly, according to the firm. J.P. Morgan is talking to clients about long-biased, fundamentally based commodities strategies that can provide diversified exposure to commodities such as energy, precious metals, agriculture, etc., with a strong and disciplined level of risk management.