Asset allocation shifts for an outcomes-oriented world

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(Pictured: Ben Phillips)

Australian institutional investors, along with the rest of Asia, expect to sell property and increase equity exposures over the next two years, as the world takes on a greater divergence in asset allocations between regions and types of investor, according to Casey Quirk.

In its eighth annual global survey, Casey Quirk, the US-based funds management research and advisory firm, says that the rising interest rate environment is the biggest concern for both asset owners and consultants. Meeting target returns is another big concern. Regulatory and political risk is a concern, too, but mainly to asset consultants than owners.

The latest survey, produced in association with eVestment, includes 135 asset owners, across pension funds, endowments and retail gatekeepers for the first time, added to the previous universe of 65 asset consultants. About 60 per cent of respondents reside in the US and 40 per cent in the rest of the world.

The differences in strategies between corporate and public pension funds, endowments, DC funds and other institutions, as well as between countries, are becoming more stark. Most pension funds, for instance, will continue to reduce their equity exposures between 2014 and 2016 and Asian funds expect to reduce their alternatives exposures. 

 

Themes for investors

The report, published last week, says respondents to the survey highlighted five key themes in asset allocation and investor behavior:

  • Further implementation of outcome-oriented investing, as investors continue to accelerate their divergence in asset allocation and buying behaviours. This reflects the long-term desire of asset owners worldwide to design policy allocations around specific objectives, which differ from investor to investor.
  • A broad concern with a rising interest rate environment across buyer channels, especially pensions, as a primary theme guiding portfolio changes.
  • A continued realignment of fixed income, with 48 per cent of all participants expecting to restructure their fixed income portfolios in 2014. Corporate plans, in particular, continue to adopt liability driven investments and rate-concerned investors de-link their portfolios from interest-rate-sensitive strategies.
  • Surging appetite for real assets as investors continue to diversify alternatives portfolios. Real assets represent the largest category of new search activity consultants expect in 2014, representing 14 per cent of forecast new search activity versus 6 per cent in 2013.
  • Increased competition among managers, particularly for traditional mandates, as net flows subside and replacement search activity becomes the norm. Domestic equity, EAFE equity and domestic fixed income will see the collective proportion of expected search activity from manager replacement increase from 45 per cent last year to 58 per cent in 2014.

 

Tips for managers

Successful asset managers, according to Casey Quirk, will adapt to changing demand drivers by:

  • Segmenting clients in order to properly position products against desired outcomes.
  • Developing compelling thought leadership that addresses concerns of target buyers.
  • Implementing data-driven forward-looking product development processes.
  • Designing new strategic engagement models for consultative sales and service.

 

Consultants expect search activity to rise primarily within three asset classes: real assets, including property and infrastructure; domestic and global fixed interest; and global equities.

The report was written by Casey Quirk partner Ben Phillips, who has been a frequent visitor to Australia over many years, director Jeffrey Levi, and managers Tyler Cloherty and Jason Roche.

It says institutional investors of all types will seek long-dated unlisted investments that also generate strong recurrent cashflow, well designed for liability immunization and inflation protection, such as real assets.

Fixed interest portfolios will be redesigned by professional buyers to protect themselves from the fallout of rising interest rates.

Global equities will benefit from the long-term trend away from home-country bias and even from domestic equity mandates more broadly. Consultants continue to increasingly favour the flexibility of global equities, relative to domestic or EAFE (for US funds).

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