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De-risking is de rigueur, survey finds

Investors are looking to continue to scale-back their exposure to US equities, increase their allocation to fixed-interest assets and strongly focus on the liability side of their balance sheets, a recent survey of funds in the US and Europe found.

The 2011 Aon Hewitt US Pension Risk Survey found 38 per cent of its respondents had reduced their exposure to domestic equities and planned to do so again in the coming 12 months. Only 4 per cent planned to increase their allocation to US equities.

While there was broad consensus on US equities, respondents were evenly split on whether they would increase their allocation to global equities in the next 12 months.

“Trend-wise we see funds are moving away from equities at a high level and into fixed-income at a high level,” said Ari Jacobs, Aon Hewitt’s managing principal and co-author of the survey.

“They are doing that through what we might refer to as dynamic or glide path strategies over time and as their funding status improves.”

The survey found investors focused on their liabilities in a range of ways that included:

  • Increasingly giving top billing to liability benchmarks over traditional asset-based performance benchmarks
  • A rising awareness of the liability-hedging characteristics of various asset classes and instruments
  • Static investment policies making way for dynamic investment policies, which aim to shift investments out of return-seeking investments (public equities; alternatives) and into liability-matching investments (long-duration bonds; swaps; futures) as a respective fund’s funding levels improve.

The liability-matching asset of choice was long-duration corporate bonds, despite a recent narrowing of credit spreads.

Of respondents, 32 per cent of said they were looking to increase their allocation to long-duration bonds, with 24 per cent expecting to lift their allocation to corporate bonds versus 13 per cent who wanted to invest more into fixed government bonds.

However, there was a divergence of views between US and UK investors on corporate bonds, with just 4 per cent of US investors saying they planned to reduce their exposure to corporate bonds compared to 20 per cent of UK investors who indicated they were going to scale-back their allocation to corporate bonds.

“In the UK, there is the sense that the corporate bond move was an opportunistic play, and that once spreads returned to normal levels the time was right to move on,” the survey authors noted.

The survey is now in its third year and garnered the views of 227 funds in the United States. More than 45 per cent of the funds it canvassed had more than 10,000 members.

Respondents were asked about their views across a range of issues from the end of 2010 to the beginning of 2011.

On the return-seeking component of a fund’s asset allocation, alternative investments remained popular, with 21 per cent of respondents reporting they had raised their allocation in 2010 compared to 10 per cent who lowered their exposure during the same time period.

Of those surveyed, 19 per cent said they planned to increase their allocation to alternatives, while 8 per cent planned to lower their exposure.

Jacobs said while there was a broad desire to seek more diversity through alternative asset allocation, there was no clear consensus on what was the most popular type of method, with funds tailoring their alternative investment choices to their particular needs.

“Certain organisations were interested in more liquid alternatives such as hedge funds with some nice returns with low correlation,” he said.

“Others have lower liquidity needs and have wanted things with more long-term gains and have gone into private equity, so it’s across the line where we are seeing that. But it is generally about getting positive returns with low correlation to other assets.”

Jacobs said he did not see a big trend in terms of US-based survey respondents moving into real assets such as infrastructure and other types of inflation-hedging assets.

“There is talk about infrastructure and other types of securities that may have some inflation- hedging capabilities or opportunities,” he said.

“But, and this is more of a US-focused comment, if you are looking for an inflation hedge, I think TIPS are still the best product to do that with rather than looking at some real assets.”

While funds were generally seeking to de-risk their portfolios and were looking to embed glide-path investing strategies into future plans, this also did not preclude them from seeking more diversity in their investments.

“Of sponsors adopting glide paths, 33 per cent also expect to raise their allocation to the alternative asset categories, against just 14 per cent of sponsors not adopting glide paths. Proportions are similar for global equity allocations,” the authors of the survey found.

“It seems that sponsors seeking to de-risk are inclined to reach for multiple tools to do so.”

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