This paper concludes that the average asset allocation of elite institutions and top‐performing funds is the single most important determinant of their superior returns during the last 20 years.
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Analysis of asset class and sector fund flows in 2011 reveals investors’ propensity to flock to defensive assets, according to data from EPFR Global.
Emerging market equities revealed the biggest difference year on year, with outflows of $47.7 billion for 2011 contrasting with inflows of $95.6 billion for the previous year.
The emerging markets equity funds tracked by EPFR Global ended 2011 with their seventh consecutive weekly outflow with uncertainty around Europe, China’s prospects this year, and high levels of inflation all cited as drivers.
Developed market equities also had significant outflows of $123 billion for the year.
All bond funds saw inflows of about $110.6 billion, with US bond funds attracting $62.3 billion for the year.
European bond flows saw a record outflow for the year of $29.8 billion, with the previous year recording inflows of $3 billion.
Within sector funds, commodities also attracted significant inflows, with about $12.8 billion for the year, with currency hedging being the significant motivation.
EPFR Global tracks traditional and alternative funds with about $13 trillion in assets.
Meanwhile State Street’s Investor Confidence index reveals a changing risk appetite from 2010 to 2011. At the end of 2011 the index was 99.3 and a year earlier it was around 104.5.
The index, which was developed by Harvard University professor Kenneth Froot and Paul O’Connell of State Street Associates, measures investor confidence, or risk appetite, by analysing the buying and selling patterns of institutional investors.
The index assigns a precise meaning to changes in investor risk appetite: the greater the percentage allocation to equities the higher risk appetite or confidence. A reading of 100 is neutral and represents the level at which investors aren’t increasing or decreasing their allocations to risky assets.
Macro-economic risks remain the biggest investment concern this year, while certain distressed assets will present the best opportunities, according to managing director of Cambridge Associates, Sandra Urie.
“The dislocation in European markets has already created investment opportunities across different credit markets, and we believe these may expand as the pace of European bank deleveraging accelerates,” she says.
“We believe investors should consider staggering commitments to European distressed funds over time, though we recognise that some European distressed funds are already finding attractive opportunities, and that some funds will offer vintage year diversification through a multi-year capital call structure.”
The timing of how this occurs may be more difficult to assess, she says, as a bank’s decision to sell an asset can be influenced by a variety of factors. She says investors should also stagger investments over time.
“On one hand, some banks have taken write-downs on assets or face higher capital charges and may therefore be open to sales, while on the other, significant government equity stakes in banks and the availability of liquidity, for example through repo lines, means that the pressure to sell assets may be reduced.”
In addition, she says European banks’ continued reductions in loan commitments are creating a vacuum, which hedge funds and private equity firms are filling.
However a defensive posture is important given the continued macro risks, Urie says.
“We continue to regard high quality equities with stable, proven franchises, and steady earnings and profits as an important core investment for participating in equity upside while investing in high quality assets that should be able to weather potential storms that may arise.”
The investment concerns at the beginning of this year, as identified by Cambridge, remain the same as in 2011.
At the start of last year, the firm’s five main concerns were:
- the corporate sector doesn’t spend, increasing the risk of global recession;
- the crisis in Europe escalates;
- a liquidity-fuelled boom gives rise to a global inflation scare;
- China overheats;
- and protectionism increases.
“While all of these concerns have serious implications, an overarching worry is that there is a tremendous amount of political disagreement about the appropriate way to deal with such risks,” Urie says.
“We enter 2012 in much the same place as 2011. Macro risks are our primary concern and the biggest risk we can see is the inability of the political system to deal effectively and decisively with the debt problem and that global imbalances lead to further erosion in confidence and further capital destruction.”
- Republican congress woman Gabrielle Giffords was among 17 shot in an assassination attempt, six killed.
- The Dow Jones Industrial Average broke through 12,000, the first time the index was above this mark since 2008. The index had its best January performance since 1997.
- Investors’ appetite for corporate bonds continued unabated with banks and companies borrowing record amounts in the US bonds markets for the first two weeks of the year. Thomson Reuters reported that $67 billion of new bonds were sold, the vast majority to non-US financial institutions including European banks, making 2011 the busiest start to the year on record.
- Mercer releases landmark report warning climate change could slash as much as 10 per cent off portfolios in the next 20 years. The report was the result of an 18-month collaboration with 14 large investors around the globe.
- The National Pension Service of Korea announces it will outsource 26 trillion Korean won ($23 billion) to external funds managers in 2011. The move is part of a plan to dramatically increase its allocations to equities and alternatives by 2015.
- Arab spring starts to bear fruit. Egyptians achieve regime change after bloody street protests. Protests spread to Tunisia, Libya, Bahrain, Syria and Yemen.
- OMERS announces it wants to manage all of its investments in-house by 2015. CIO Michael Latimer says this will mean a doubling of each business unit as the fund rolls out an ambitious program to make it an investment house for other institutional investors.
- Japanese Tsunami kills more than 20,000 people and destroys 125,000 buildings. The Fukushima nuclear power plant goes into meltdown, causing an ongoing nuclear crisis.
- Libya civil war begins. NATO enforces no-fly zone in Libya.
- CalPERS sets external fee reduction target, as it is revealed it spent more than $1 billion on external management fees.
- Teacher Retirement System of Texas debates, and rejects, the idea of appointing an independent chief risk officer outside of the investment management division.
- China launches its 12th five year plan.
- China toughens housing controls as watchers raise concerns about a housing bubble developing in the country.
- The OECD warns pension funds will come under increasing pressure as national governments cut old-age pensions, expecting the private sector to deliver ever-higher returns to fund increasing longevity. The report cites Germany, Ireland, the UK, and New Zealand as addressing these issues in reform agendas.
- Department of Labour announces that under new regulations service providers in the US will be required to disclose any direct and indirect compensation to plan fiduciaries from July.
- European Central Bank raises interest rates by 25 basis points, China raises interest rates by 25 basis points.
- As part of the implementation of its new strategic asset allocation, CalPERS introduces a raft of new benchmarks. These include composite benchmarks for the new asset classes of growth, real and liquidity created under the restructure.
Brent hit high for the year of $126 bbl. - France bans the burkha.
- Osama Bin Laden killed in Pakistan.
- IMF Chief Dominique Strauss-Kahn embroiled in sex scandal after alleged sexual assault of a hotel maid in New York.
- Sino Forest accounting scandal raises questions about corporate governance standards of Chinese companies.
- Housing continues to drag the US economy down further. The S&P/Case-Shiller Index confirms a double dip in home prices. The report shows that prices in 20 cities dropped to their lowest levels since 2003.
- Euro debt crisis escalates, Greece on the brink of default.
- QE 2 allowed to expire on schedule.
- High-profile Dutch pension funds and their service providers come out in support of an agreement to radically reform the country’s pension system.
- Government Pension Investment Fund, Japan reports it has substantially increased its allocation to international equities, moving more than $31.8 billion of assets into offshore equities in the year to June.
- Tumult begins on global markets on the back of sovereign debt concerns and worries about the US economy.
- The US debt ceiling debacle shakes confidence on global markets and clearly demonstrates the limitations of the country’s political system to deal with the economic crisis.
- EBA bank stress tests, and ECB hikes rates.
- China raises interest rates 25 basis points.
- New Jersey’s public pension fund says it is looking to almost double its allocation to alternatives to almost 30 per cent of the fund. It will boost its allocation to hedge funds and cut back its equities exposure.
- Norwegian mass-shooting shocks the world.
- The China Investment Corporation reports it deployed nearly 30 per cent of its cash, or $35.7 billion, in 2010 into alternatives, increasing its allocation from 6 per cent to 21 per cent.
- S&P downgrades US credit rating.
- The US summer is anything but sunny on stock markets. By August 10, the Dow had plunged to 10,719, from 12,724.4 on July 21.
- CalSTRS CIO Chris Ailman says volatility in global markets has prompted the $154 billion fund to an underweight global equities position, moving assets into cash.
- Widespread looting and arson as riots break out in the UK.
- Bank of America goes into meltdown, shares drop 32.96 per cent, to $6.51.
- Brazil surprisingly cuts rates in an indication BRIC countries will not be immune to economic problems besetting the developed world.
- After an extensive review and high-level workshop CalPERS’ investment team will seek for a total-fund plan to more fully integrate ESG principles into all investment decisions.
- Occupy Wall Street protests begin.
- A group of eight institutional investors launches a guiding set of principles for responsible investment in farmland, which forms part of a UN Principles for Responsible Investment (PRI) push to provide practical guidelines for specific asset classes.
- US President Barack Obama announces $447 billion stimulus plan.
- Investors in News Corporation revolt at AGM over phone hacking, voicing strong opposition to Rupert Murdoch’s plans to pass control of the company to his sons.
- EU summit and “master plan” fails to placate market doubts over the Eurozone.
- Wilshire annual review finds CalPERS’ absolute return strategies program is over-reliant on quantitative tools, inadequately staffed and may be overweight in certain strategies and risks.
- US Fed’s “Operation Twist” commences.
- The $35.7 billion Healthcare of Ontario Pension Plan (HOOPP) splits its chief investment officer function in two following the appointment of Jim Keohane to president and chief executive after the retirement of John Crocker.
- Muammar Gaddafi dies.
- Occupy Wall street protests spread.
- CalPERS announces it will undertake sweeping changes to the way its board operates as part of a package of governance reforms to will roll out in 2012.
- Apple co-founder Steve Jobs dies.
- Federal Reserve Chairman Ben Bernanke said the recovery was still “close to faltering”.
- Derivatives broker MF Global blows up, leaving a string of creditors and ongoing doubts about financial regulators.
- Greek Referendum floated then cancelled.
- New York announces radical overhaul of its pension system, consolidating the investment strategies for its five pension funds and reforming the governance structures of the funds.
- Kweku Adoboli, a 31-year-old trader at UBS arrested in London. Adoboli is accused of costing UBS $2.3 billion by making unauthorized trades.
- California Governor Edmund G Brown Jr announces sweeping 12 point pension reform plan. CalSTRS and CalPERS warily offer support for his interjection.
- Italian PM Silvio Berlusconi resigns and is replaced by technocrat Mario Draghi.
- US Super Committee on budget cuts fails to reach agreement.
- Texas Teachers Retirement System extends its public markets strategic partnership structure to two of its private market managers. The fund claims the move will re-shape how public pension funds engage private market managers.
- S&P downgrades dozens of global banks on methodology change.
- ECB cuts rates by 25 basis points.
- S&P puts multiple European sovereigns on negative watch.
- Durban Climate Change summit sets out road map for future CO2 cuts.
- Belgian public sector workers strike over pension reform.
- North Korean leader Kim Jong-il dies.
The downgrade of the US took the entire industry by surprise, in a year that confirmed the complexity and unpredictability of markets, CalSTRS chief investment officer, Christopher Ailman, says. (more…)
Someone once told me the reason the Dalai Lama is always smiling, even when he’s talking about war, is that his view of the world, and all its troubles, is like a knowing father watching a child work through the wonderment and challenges of life. It is with this view that institutional investors must face the climate change challenge. (more…)