Asset allocation and risk continue to be the top issues for institutional investors in 2015 and, while nobody is sure what the economy will do in 2015, investment fund managers remain positive about investments in equities and alternative assets over the long-term.

Only 25% of fund managers believe the investment strategies of their institutional clients will become more aggressive this year, which is a sharp drop from last year when 44% said their clients would invest more aggressively, according to the Global Survey of Investment and Economic Expectations, released by consulting firm Towers Watson. Thirty-four percent of respondents believe their clients will invest more conservatively, which is a slight increase from 29% in 2014.

“Our view is that global inflation markets are pricing in an extension of the current disinflationary environment, or the inflation risk premium is depressed or both,” said Matt Stroud, head of delegated portfolio management for Towers Watson. “Given the slack in major developed economies, we believe market-implied levels of inflation are broadly consistent with our outlook. In addition, risks to our forecasts remain skewed to the downside.”

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Returns have been strong since the global financial crisis, particularly during the past two years.

“Short-term increases in risk aversion and volatility are relatively common as economies move through the mid-stages of their business cycles, and this is what we observed coming into January of 2015,” the study found.

Respondents expect the U.S. unemployment rate to drop to 5.5% in 2015, compared to 7% in 2014, but are still wary of the government intervention, including monetary, fiscal, legislative and regulatory measures.

Many of those surveyed said they still expect high inflation over the long term.

“Our view is that global markets are pricing in an extension of the current disinflationary environment and the inflation risk premium is depressed. Given the slack in the major developed economies, we believe market-implied levels of inflation are broadly consistent with our economic outlook,” Towers Watson said.

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The U.S. dollar gained strength in 2014 and survey respondents felt that trend would continue in 2015, “making it a rewarding investment opportunity in 2015,” Towers Watson said. “It also illustrates the belief that on the back of 2014’s currency volatility, currencies will continue to play an important role in total returns and the management of assets.”

Fund managers expect equities to deliver the strongest returns in Japan, 9%, China, 8.5% and the U.S., 7.2%. They expect lower returns in Australia, Canada and Switzerland, the survey found.

Seventy percent of managers are bullish on emerging-market equities for the next five years, while 73% are bullish on public equities, 60% on infrastructure and 55% on private equity, the survey found. For the same time period, a majority of managers are bearish on nominal government bonds, investment-grade bonds and high-yield bonds, according to Towers Watson.

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“We believe equities will provide reasonable returns as easy monetary policy and mediocre growth combine to offer a relatively supportive environment, although valuations will vary across markets,” said Stroud. “Short- to medium-dated sovereign bonds will provide reasonable returns as priced-in cash rates continue to be revised lower. Conversely, credit markets appear vulnerable to downside economic risks from an economic perspective, and from creeping leverage and weaker underwriting standards. Low starting yield spreads fail to provide much cushion against anything other than a benign outcome.”

When asked to identify their most critical investment issues over the next five years, 61% of respondents cited government intervention, including monetary, fiscal, legislative and regulatory measures. Forty-two percent identified global economic imbalance as a critical issue, followed by inflation (35%). Managers also identified asset allocation and risk as the two most critical issues facing their institutional investor clients.

“It’s not surprising that a majority of investment managers are concerned over governmental intervention, especially in light of last year’s end to the Fed’s bond-buying program and anticipation of the European Central Bank’s announcement of quantitative easing,” said Stroud.

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