Big pension funds list their target asset classes for next 3 years

Investment grade bonds, followed by emerging market equities and then diversified global equities, are the asset classes which will best meet the requirements of large pension funds and multi-manager packagers, according to a survey of the fiduciaries of assets totalling more than $5 trillion.

The survey, conducted by leading research firm Create-research, was commissioned by Edinburgh-based global equities specialist Martin Currie Investment Management. Martin Currie published the results at its recent biennial global conference, which was attended by 50 of the world’s leading investors in May.

About 80 respondents were asked which products or asset classes would best meet their needs over the next three years and which would require “maximum innovation” to meet those needs.

Investment grade bonds not only had the most respondents (54 per cent) who said the products would best meet their needs, but also the least who said they needed maximum innovation (1 per cent).

Emerging market equities would be nearly as popular (53 per cent), but 9 per cent of respondents thought the asset class required maximum innovation.

Similarly, global equities were considered by 52 per cent of respondents as most suitable to their needs, but 11 per cent said the asset class needed maximum innovation.

Of the universe of 22 asset classes or products presented to the respondents, the least likely to best meet their investment needs over the next three years were: liability-driven investments; distressed debt; regional equities by sector; portable alpha products; and currency funds.

The aftermath of the financial crisis sees more than 80 per cent of funds expected to review their strategic asset allocation over the next one to three years; 52 per cent expected to have more frequent review of managers and 50 per cent would increase resources for managing risk.

Multi-managers were more likely (41 per cent) to review strategic asset allocation than pension funds (21 per cent).

Asked what had been the impact of the financial crisis on their organisations, most (67 per cent) responded: “raised awareness of the strength of the financial institutions we deal with – , followed by “encouraged us to look out for great buying opportunities” (47 per cent).

Professor Amin Rajan of Create-research, who presented the survey’s findings at the conference, said the surveyed respondents reacted with a blend of profound disillusionment, cautious opportunism and disciplined introspection.

They were disillusioned because they were still repairing the damage caused by the 2000-2003 equity bear market; they were cautiously opportunistic because many assets were now apparently mispriced; and were introspective because they imagined a change in areas such as risk management and managerial oversight in which quality and transparency were critical.

Other themes to emerge from the conference included:

. the new “hygiene factors” of investment were quality, liquidity and transparency

. complex investment strategies dependent on black box processes or the interaction of opaque derivative strategies were out of favour

. investors continued to believe in equities, with both global and emerging markets seen as core asset classes in the medium term, but

. not all emerging markets offered the same potential – Asia, in particular China, offered significant opportunities.

Commenting from Martin Currie, Andy Sowerby, managing director, said: “We commissioned this research as we recognised a need to understand exactly which issues, challenges and opportunities were facing our clients today. What came through was a need for asset managers to focus on alignment of interest, product delivery and increased service. Asset owners want to establish partnerships to solve the problems raised by the crisis and asset managers need to invest accordingly, irrespective of the current market turmoil. On the product side the cry is back to basics with traditional asset classes finding real favour allied to manager stability, process transparency and fund liquidity.”