Institutional investors are continuing to push into developed and emerging market equities due to funding pressure despite strong expectations of a market correction, research has shown.
The data from State Street Global Advisors (SSgA) showed 63% of global institutional investors increased allocations to developed market equities despite 60% expecting a negative market correction of 10-20%.
Some 44% said the market was overvalued with a correction overdue, but two-thirds said funding pressures were forcing increased allocations.
More than 50% said they would like to reduce equity exposure if an alternative capable of producing a similar return were available, but funding requirements (53%) and pressure to meet objectives (58%) meant equities continued to be increased and used.
Niall O’Leary, head of portfolio solutions at SSgA, said investors continued to be overweight and were looking over their shoulders for the market correction.
“[Investors are] uncomfortable with their position but cannot find an alternative,” he said.
“The majority expect a drawdown, so they are overweight, they are adding and they are nervous.
“The pressure to meeting funding standards and investment objectives, and the lack of opportunities elsewhere, has created an unholy challenge.”
However, 55% suggested equity markets continued to offer good value.
The research, which canvassed 420 global institutional investors across 13 countries, showed that, despite expectations of a downturn in equity markets, 91% said their portfolios were able to weather a major market correction.
Two-thirds thought diversification alone was enough to protect portfolios.
Despite investors’ confidence in their own portfolios’ ability to withstand a correction, 45% of investors said other institutional investors were unprepared for volatility.
Only 8% said recent market volatility had had a significant impact on their strategies and were looking to implement additional protections, as two-fifths said short-term volatility was the new norm and should be expected.
Around 85% also implemented downside-protection strategies, with 53% choosing dynamic asset allocation – a percentage that rose to 63% when looking specifically at Europe.
Investors were also looking at low-volatility and volatility-targeting strategies as downside protection.
However, 54% of investors said the timing of downside strategies remained the biggest challenge to implementation due to concerns over losing too much upside from bull equity markets.
“There is an expectation of downside strategies that you have a smoother journey but a lower long-term return, so the insurance you pay is never fully recouped on the upside of the market,” O’Leary said.
He said investors also had concerns about the risk of downside strategies failing to perform and the cost of implementation.
One-third of investors said they lacked sufficient knowledge to be comfortable with the strategies.
“The risk of these downside strategies not fully working does exist and is more pronounced in some strategies over others, which is why investors haven’t just chosen one approach,” O’Leary said.
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