Funds “overreacting” to market volatility: MSCI

A global survey of asset owners shows they are increasingly being short-term in their focus and may be overreacting to the current market volatility, says Frank Nielsen, co-head of MSCI’s global applied research group.

The MSCI Global Asset Owners Survey of 85 asset owners in 26 countries was conducted between June and August 2011 and was released this week.

Nielsen (pictured) says the survey reveals that the current uncertainty in markets is producing a short-term outlook and a greater focus on risk management.

“There is a risk that they [asset owners] are basically overreacting now to the recent crisis and have become too dynamic and too responsive and are forgetting that they have a long-term investment horizon,” Nielsen says.

“This is clearly one main result that people across the board have shifted to a much shorter focus.”

The last time MSCI conducted a survey of this kind – covering public and corporate pension funds, endowments and sovereign wealth funds – was after the 2008-09 financial crisis.

In this latest survey, 20 per cent of the funds surveyed have between $50 billion and $250 billion in assets under management and 11.8 per cent have more than $250 billion.

More than 35.3 per cent of funds surveyed have between $10 billion and $50 billion in assets under management, the remaining 33 per cent had less than $10billion AUM.

MSCI found that investors are reviewing their strategic asset allocation with greater regularity and are also looking at tactical and event-driven investments more often.

“A couple of years ago it was every three to five years that you did your strategic asset allocation; now the majority say they do it on an annual basis,” Nielsen says.

“The same can be seen for the tactical allocation. Historically, it was six to 12 months, now it is one month or even event driven…So, there is very much a short-term focus that is then reflected in the types of risk tools and risk measures [that] asset owners start looking at. Many are moving to analysing their portfolio in terms of value at risk, and those are very short-term measures.”

Despite in the previous survey expressing concerns about liquidity and transparency when it comes to hedge fund and private equity investments, asset owners in this latest survey are allocating to these alternative assets.

There is generally more emphasis on alternative asset bucketing schemes, say the authors of the survey, with private equity making up on average more than 20 per cent of the alternatives allocation.

“People told us that they would invest less in these illiquid alternatives, but what we are seeing now is that has been pretty much forgotten and people have begun investing heavily in private equity, hedge funds, infrastructure, real estate and commodities,” Nielsen says.

“A lot of money has gone into these alternatives that are less liquid, less transparent, and I think that is a very interesting finding, and is very much opposed to what people told us three or four years ago.”

Real estate makes up 34 per cent of the average allocation to alternative assets while infrastructure models are less compelling to asset owners, consisting of around 5 per cent on average of alternatives.

Hedge funds make up 20 per cent on average and commodities around 10 per cent on average.

The average, aggregate traditional fund asset allocation for respondents is split 43 per cent equities, 37 per cent fixed income and 20 per cent alternatives.

The survey found that the top risk concern for more than 70 per cent of asset owners is market risk. This is closely followed by liquidity risk and counterparty risk. More than 60 per cent of participants are concerned about these two risks.

By comparison, regulations risk worries just over 10 per cent of asset owners and active management just over 30 per cent.

When it comes to risk management, there has been what the survey authors describe as a “paradigm shift”, with more resources dedicated to measuring and managing risk.

As part of this process asset owners say they are making more efforts to integrate members of the risk team and investment staff.

More than 40 per cent of asset owners surveyed have increased the communication between their risk and investment teams.

In addition, more than 20 per cent of those surveyed have bulked up their investment teams and more than 20 per cent have added a risk team, while 10 per cent of funds have hired a chief risk officer.

More than 40 per cent of funds now report monthly on risk to the board.

Funds are also taking a more comprehensive approach to measuring risk, especially large funds.

More than 90 per cent of funds surveyed with between $50 billion and $250 billion in assets measure risk at a total plan level, incorporating publically traded asset information with proxies for the alternative classes, while all funds this size do so at the asset class level.

More than 80 per cent of these larger funds also measure risk at the manager level.

When it comes to ESG policy participation, there are stark regional differences between the Americas and ex-America, particularly Europe.

Less than 20 per cent of Americas funds surveyed say they have an ESG policy while more than 60 per cent of those funds outside of that region say they do.

The survey also found that 66 per cent of funds with an ESG policy are also signatories to the UN-backed Principles for Responsible Investment.