bfinance: institutional investors well-placed to manage the asset price volatility expected in 2014

bfinance survey provides insight into how major asset owners plan to respond to the adverse effects of FED tapering over the coming months. Institutional investors reiterate their intention to allocate more to private assets, especially real estate. Interest in solutions that permit an increased exposure to risky assets through an improved management of volatility is increasing.

bfinance, the independent investment consultancy, today releases the results of its 9th Pension Fund Asset Allocation Survey, which show a relatively jittery investor community as the scale down in the US Federal Reserve’s asset purchase program has become a reality.

After a year marked by improved market performance unseen since the global financial markets crisis began in 2007, major asset owners seem torn between the general forecast of a moderate global economic recovery in 2014–which advocates a continued ‘risk-on’ bias in portfolio allocations–and the necessity to protect the assets from the possible adverse impact of Federal Reserve tapering.

In November, bfinance surveyed European and North American pension funds, insurance companies, family offices and other institutional asset owners and allocators representing a combined assets value of US $275 billion.

The key findings of the survey show:

• Institutional investors continue to view asset price volatility as the major source of risk for the year ahead, ahead of currency volatility and of a liquidity/credit crunch.

• In comparison to last year, the world’s major asset owners seem far more prepared to manage these risks. The share of investors that declare having action plans to protect their portfolios from the tapering process’ presumed adverse effects has nearly doubled to 40%.

• The investment outlook over six months and three years is one of continuing diversification to emerging market debt and real assets such as property and other alternatives, in particular, infrastructure. On the other hand, interest in credit is fading, at least over the short term, while investor intentions towards sovereign bonds over a three year horizon indicate a pick-up.

• Confidence in smart indices and in absolute return strategies such as Diversified Growth / Risk Parity strategies to manage asset price volatility is confirmed, with 59% of investors planning to allocate to alternative indices this year versus 47% currently.

• Opinions are divided on rate rises in 2014. More than half of respondents do not anticipate any rise before 2015 (if at all). Overall, three quarters of respondents intend to take advantage of the bond market volatility that is expected to come with tapering.

Regarding changes in the general economic and business climate over the next 12 months, the survey shows a strong commitment by institutional investors to control the impact of potential rising interest-rates and market volatility. Respondents are split equally between maintaining their exposure to traditional bonds or reallocating to other types of investments during the normalisation process.

Emmanuel Lechere, Head of the Market Intelligence Group at bfinance, commented: “If during the financial crisis, portfolio diversification had lost much of its ability to mitigate risks, the continued reduction in traditional asset class correlations observed over the last two years gives new impetus to this investment approach today.”

Chris Jones, Head of Public Markets & Alternatives for bfinance, said: “Institutional investors foresee volatile times in 2014 and have prepared or are getting prepared for a bumpy road ahead in a variety of ways. If this anticipated volatility occurs, investors will have to stay nimble throughout the year not only to control the risk and downside in their portfolios but also to take advantage of the investment opportunities such volatility can create.”

Source: Parex PR

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