Survey finds low-return outlook shaking up investment practice
GLOBAL - Institutional investors around the world are radically re-thinking their investment management assumptions and shaking up their governance structures in response to worries about failing to meet their required medium-term returns, according to findings from the 10th Pyramis Global Institutional Investor Survey.
Moreover, the survey suggests concerns run deepest among European investors.
Mike Jones, president and chief executive at Pyramis, said: "In an effort to boost returns, institutions globally will have to accept more risk or different kinds of risk. Some are completely re-thinking long-held beliefs about asset allocation."
The survey reveals that European investors' expected or required return on their total scheme assets is 5% annualised, on average.
More than half of those investors are not confident of achieving that return over the next five years - more than the global average of 36%.
The reason for these doubts is revealed by the top concern expressed with regard to managing investment portfolios: the perception that investors are in a low-return environment - picked out by 31% of the respondents globally.
The survey suggests that investor time horizons are shortening as a result.
When asked what changes had been made to risk management processes over the past three years, the two most popular responses revealed that risk measures were being reviewed more frequently (48% of the global survey) and more tactical asset allocation decisions were being taken to adapt to the 'risk-on, risk-off' environment (41%).
Only one-fifth of respondents claimed not to have made any changes at all.
European and UK investors were more likely than the global average to list executing timely asset allocation decisions as their greatest investment challenge.
Around half of the respondents said they were re-thinking the traditional asset allocation model - but again, that rises to 67% in Europe.
Most considered factor-based models or models based on immunisation and LDI approaches the more likely to prevail over the coming decade.
A significant number of respondents - 33% of US public pension plans and 29% of Europe ex UK investors, for example - said they had changed the nature of their relationship with their investment partners over the past two years.
Most of these, 60%, had simply sought more assistance with policy design, strategic asset allocation and manager oversight.
However, 11% had moved to a full outsourcing solution, in the form of fiduciary management or an outsourced CIO.
In Europe and the UK, the full outsource model is more hotly pursued, with 23% opting for some variant of this approach.
Among all the indication of increased short-termism, tactical decision-making and its attendant outsourcing to specialist advisers, however, a majority of respondents, 38%, revealed that the resulting change to their investment mix of these pressures was actually an increase in illiquid alternatives - suggesting a desire to take a longer-term view on the illiquidity premium in a context of generally lower return expectations.
Young Chin, CIO for equity and alternatives at Pyramis, said: "The survey reveals that a lot more investors are now not only thinking and talking about how circumstances have changed, but actually doing something about it rather than hoping things revert back to long-term norms.
"And this is a broad sample, so these are not the outliers we always hear about - this is the typical institution speaking."
This 10th edition of the annual survey by Pyramis was the first to be conducted in all global regions simultaneously.
There were 632 respondents from 16 countries, managing $5trn (€3.8trn).
Eighty-five percent were pension funds (57% corporate pension funds and 28% public pension funds), and Europe accounted for 24% of the respondents.
Forty-eight respondents are based in the UK, 27 in the Netherlands, 29 in Switzerland, 10 in Denmark, 10 in Finland, 11 in Sweden, 11 in Iceland and three in Norway.