After several years of navigating high volatility and market uncertainty, the latest AMP Capital Institutional Investor Report reveals that institutional investors are now focussed on increasing returns for their clients.
The survey of global institutional investors, who manage a collective US$1.9 trillion, found respondents highlighted boosting returns as among their most pressing concerns (46 per cent) closely followed by reducing volatility (37 per cent) and reducing risk overall (31 per cent).
The largest proportion of respondents feel increasing the use of non-market driven strategies, such as absolute-return and inflation-plus instruments, would be especially effective ways to increase returns (48 per cent) and decrease portfolio risk (52 per cent) during the next 12 months. Increasing allocations to liquid or illiquid alternative assets was also cited as an especially effective way to increase returns (46 per cent) or decrease risk (33 per cent).
When it came to likely shifts in asset allocation, alternatives again proved to be in favour. Thirty-five per cent of investors expected to increase their allocation to alternative assets as opposed to more traditional asset classes such as fixed income (22 per cent) or equities (19 per cent). Forty-two percent of respondents expected the size of their equities portfolios to decrease.
AMP Capital Chief Executive International and Head of Global Clients Anthony Fasso said: “In what is still a tepid recovery from the post-Lehman crisis, many fund managers are eager to reduce risk especially as their plans approach fully-funded status. This has led them to step away from publicly-traded markets and turn to alternative investments and liability-driven investment strategies as a means to shelter their plans from changes in asset value and interest rates.”
Regardless of this marked enthusiasm for alternatives, decision makers at pension and retirement plans do not expect a seismic shift in asset allocations during the next year, explaining that any 12-month period is too short for plans to initiate and execute dramatic asset allocation changes.
AMP Capital’s survey also found that where assets are being reallocated, this is more likely to be initiated by internal investment teams (44 per cent) compared to third-party investment advisers (19 per cent).
Mr Fasso said: “The majority (41 per cent) of those surveyed said that it would take their schemes three to four months to decide to change asset allocations and to develop a strategy to implement that change; however, 35 per cent said that it would take more than six months to do so. This is concerning as it implies that more than a third of schemes are not able to react quickly to market volatility.
“Investment decison makers at retirement plans recommend speeding up the decision-making process regarding asset allocation changes as well as making the process more independent from plans’ trustees and boards.”
Only 15 per cent of respondents said it took between one and two months to implement a strategy to change asset allocations.
AMP Capital asked respondents what they would most like to improve about the ways their schemes make decisions, especially regarding changing asset allocation, and received the following answers:
“Decisions are made at the staff level regarding asset allocations [at our plan], but all decisions are approved at the Board level, and this process is slow and inflexible,” says the CIO of a North American pension plan with US$1 billion–$10 billion of assets under management.
“Our investment committee currently meets four times a year, as required by law, so decision-making is slow,” notes a portfolio analyst at a mid-size pension plan in North America.
“We should review asset allocations on an ongoing basis and adjust as warranted, as opposed to using a five-year study,” says the CIO of a North American pension plan with US$10 billion–$50 billion of assets under management.
“We need to shorten the implementation time [after deciding to shift asset allocations],” states the CIO of a North American pension plan with US$1 billion–$10 billion of assets under management.