According to a press release, 80% of survey participants identified credit risk as the most important type of risk, followed by manager risk and market (beta) risk. Sixty-one percent of CIOs surveyed ranked shortfall risk as the most important, while 49% selected liquidity risk as most important.
The most prominent and preferred risk management tools cited in the survey were portfolio correlation analysis, alpha-beta attribution, stress testing, and Value at Risk, the press release said.
Public funds are more willing to pursue strategic partnerships to help them manage their portfolios. When evaluating strategic partnerships, the survey showed that CIOs are seeking partners with sophisticated risk-management capabilities, access to proprietary insights and investment research and expertise across a broad range of asset classes and strategies.
Despite the volatile markets, private equity, real estate, hedge funds and non-U.S. equities are among the top asset classes into which CIOs expect to increase their asset allocations over the next two years. On average, public funds have a 16% cap on their allocation to alternatives. Forty-three percent of funds allow an exposure to alternatives in the 10% to 20% bracket, and 13% of funds now allow for an exposure to alternatives of 30% or more.
The mean target annual rate of return for the public funds in the survey is 8%.
The MSIM Public Fund Survey also found plans have been increasingly relying on external providers for investment advice. Investment consultants represent the primary source of strategic and investment advice, while CIOs tend to look to asset managers for expertise and support in more specialized areas, especially derivatives, the press release said.
The survey showed that, despite limitations, 74% of public funds currently use derivatives in the management of their portfolios.
"The results of the survey demonstrate that the demands associated with the increased volatility and complexity of today's financial markets have put considerable strain on U.S. public fund resources by introducing new issues, such as shortages of specialized staff and increasingly sophisticated risk-management needs, and exacerbating old ones, such as limitations imposed by politics, investment policies and the time needed to educate boards," said Doug McNeeley,
Managing Director, Co-Head of Public Funds and member of the Strategic Client Advisory Team at MSIM, in the announcement.
The survey was conducted between July and August 2008, entailed interviews with 51 CIOs of U.S. public funds with portfolios larger than $1 billion, including representatives of county, city and state funds located in 30 states throughout the country.
The full results of the MSIM Public Funds CIO Survey are available upon request by e-mailing Erica Platt at Erica.Platt@morganstanley.com .
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