Recession Did not Substantially Change Institutional Investment Strategies

October 6 2009 ( - Despite the economic recession, institutional investors have remained fundamentally committed to the same investment policies they were adopting prior to the credit crunch, according to a new report from The Conference Board.

The 2009 Institutional Investment Report , released each fall, indicates that at the end of 2008, when measured as a percentage of outstanding U.S. financial assets, institutional assets had reached the lowest level since 1980, or 15.8%. The industry reported substantial losses across virtually all asset classes, with total institutional assets plunging 21.3% to $22.2 billion, a level similar to what was recorded in 2004.

Declines in capitalization occurred fairly evenly across the institutional investor spectrum, without significant changes to the share of total institutional assets held by type of institution, with pension funds holding the most, at 38.6% of total institutional assets, according to the report. Mutual funds and other investment companies were hit the hardest by the recent market decline and capital withdrawals, with outflows totaling $2.5 billion for the year, or 30.7% of their 2007 asset value. Pension funds lost 24.1% of their 2007 asset value, while insurance companies experienced a 7.8% contraction.

Regarding institutional investment in equity markets, the report said that despite the significant recent market declines on their equity portfolios, institutions still own a large majority of top American businesses. In addition, at the close of 2008, as a result of stock market correction and the 45% median loss suffered by their equity portfolios, mutual funds were reporting much more balanced asset allocations.

By the end of 2008, the total market value of the fixed-income portfolios of institutional investors was substantially unchanged from the prior year. When measured as a percentage of outstanding U.S. bonds, institutional bonds had reached their lowest level in the last decade, or 23.7%.

Variations in bond allocations registered for some institutional investor categories – open-end investment companies, for which bond investments went from 28.1% of the aggregate market value of their portfolio in 2007 to 41.9% in 2008; and pension funds, for which bond investments went from 19.3% in 2007 to 25.8% in 2008. Those shifts were driven by the decline of the stock market rather than changes in investment policies, according to The Conference Board.

The report said institutional investors remain committed to alternative investment strategies, with a large foray into hedge funds seeking higher returns and reduced volatility to meet actuarial projections.

Mutual funds also remain major investors in non-U.S. securities, driven by the growing demand for diversification. In 2008, total assets held in foreign securities by the 25 pension funds with largest foreign allocations amounted to $206.9 million, compared to $210.3 million of total equities held by the 20 largest mutual funds focusing on international investment strategies.

To purchase The 2009 Institutional Investment Report , call The Conference Board customer service department at 212-339-0345.