GLOBAL - Pension funds are asking asset managers for more innovation, but only where specific principles are met that better match their needs.
According to a report entitled 'Investment Innovations' and published by CREATE-Research, pension plans believe emerging market equities, emerging market bonds, high-yield bonds, liability-driven investing and exchange-traded funds (ETFs) have delivered good value for money over the last decade.
When asked which innovation had delivered the best value, 58% of pension plans cited emerging market equities, while 32% said emerging market bonds.
Pension funds attribute the success of these innovations to strong belief in their intrinsic worth, a disciplined approach to buying and selling, and in-house capabilities to chase 'early-mover' advantage, the report said.
Leverage, structured products, portable alpha and currency funds delivered the least value for money, according to CREATE-Research.
The report also cited 2008 as a watershed year for financial innovation, with many of the new products, asset classes, return-enhancing tools and asset allocation techniques showing themselves to be increasingly fallible.
Professor Amin Rajan, chief executive at CREATE-Research, said: "The global economy is still in a state of uncertainty, and strong headwinds in the shape of financial regulation, scarcity of talent and revised client expectations are buffeting the industry.
"Against this backdrop, there has to be a clear line of sight between innovations and client needs. Asset owners will demand creative solutions, which deliver tangible value. New products developed without such fundamentals and without clear client engagement will struggle to gain traction."
Almost 40% of the pension plans surveyed believe further product innovation would deliver genuine value for money to end clients over the next three years.
They expect future innovations to include a better delivery of returns within a more symmetric fee structure, as well as greater transparency and simplicity.
In total, 60% of pension plans want improvements in the risk-return features of different asset classes, while 43% want greater transparency in the investment process.
Nick Lyster, chief executive at Principal Global Investors Europe, said: "First and foremost, there should be a direct link between innovation and client need.
"That means building tailored investment solutions that are relevant and additive to clients' business objectives, rather than creating copy-cat products or those that rely on financial engineering.
"The multi-boutique model provides a strong platform to execute this strategy, enabling a deep knowledge of products combined with an ideas-centric, client-driven approach."
However, the survey reveals that more than 40% of pension plans and asset managers think a switch from 'products' to 'solutions' - as well as fallout from new regulation - will influence the pace and content of innovations after the crisis.