Confidence has returned among institutional investors worldwide, according to a new survey by Pyramis Global Advisors.
Nine in ten (91%) pension plans and other institutional investors believe they can achieve target returns in five years, significantly higher than the 65 percent reported in 2012, according to the 2014 Pyramis Global Institutional Investor Survey, which includes 811 respondents in 22 countries representing more than USD$9 trillion in assets.
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"A recent spike in market volatility comes after years of strong equity returns and below average volatility," said Pam Holding, chief investment officer, Pyramis. "Our global survey suggests that while institutional investors have divergent views on volatility, most want to keep their winning streak going by continuing to grow their portfolios and improve funded status."
Significant Regional Differences
The Pyramis survey identifies regional differences across such topics as: expectations for market volatility, perspectives on alternatives, investment objectives and investment opportunities.
Market Volatility Expectations
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By GlobalDataOutside the U.S. and Canada, volatility expectations over the long term are quite low with a decrease in the frequency of boom/bust cycles expected in Asia (91%) and Europe (79%). Only seven percent of U.S. institutions expect volatility to decrease, while 42 percent expect an increase in volatility. This trend continues across North America with only 10 percent of Canadian plans expecting a decrease in volatility, while 60 percent foresee an increase.
While market volatility remains a top concern in Europe and Asia, U.S. institutions are expressing less worry about capital markets than years past. Europe also remains concerned about a low return environment, while Asia is focused on regulatory and accounting changes and Canada is focused on risk management. The top concern for U.S. plans is current funded status (28%), with a majority of pensions intending to improve it.
Perspectives on Alternatives
While the use of alternative investments is still rising rapidly in the rest of the world, use of liquid and illiquid alternatives appears to be slowing among U.S. institutions.
Among respondents planning an allocation increase to illiquid alternatives over the next one to two years, Asia leads the way with 79 percent, followed by Europe (57%) and the U.S. (22%).
When asked which investment approaches are most likely to underperform over the long term, 31 percent of U.S. respondents cite hedge funds as least likely to meet expectations. Risk factor investing is expected to be the biggest disappointment among Canadian, European and Asian plans.
When asked specifically about the fees associated with alternative investments, only 19 percent of U.S. plans surveyed say hedge funds and private equity are worth the fees, as compared to 91 percent in Asia and 72 percent in Europe.
"U.S. plans are currently reevaluating the complexity, risks and fees associated with hedge funds," said Derek Young, vice chairman of Pyramis Global Advisors. "Our survey suggests that U.S. institutions are preparing to move back to a more traditional, back-to-basics portfolio."
Investment Objectives
On average, primary investment objectives among global institutions lean toward growth, but results vary considerably by geography. Asian institutions are overwhelmingly focused on growth, with 64 percent listing capital growth as the primary investment objective. For plans in the U.S., funded status growth is the primary investment objective, but levels differ among public plans (62%) and corporates (37%). Plans in Europe are primarily focused on preservation, while Canadian institutions are equally focused on preserving and growing their funded status.
Investment Opportunities
A global view of the survey results shows plans are seeking investment opportunities over the medium term predominantly in emerging Asia. However, a regional breakdown reveals a geographic tilt. Seventy-one percent of plans in Asia cite emerging Asia as the top medium-term growth prospect. U.S. and Canadian plans favor North America (34%) and emerging Asia (32%). European plans favor North America (33%), emerging Asia (21%) and developed Europe (19%).
