Survey: Institutional Managers Have Higher Aversion to Risk

(July 18, 2011) — A recent study by Northern Trust shows institutional investment managers are growing increasingly averse to risk, with 42% of managers surveyed by Northern Trust saying they were more risk-averse than they were one quarter ago.

“It appears that our managers are becoming increasingly concerned that economic growth may be hitting a soft patch, a view that we’ve seen reflected in their more cautious approach towards risk,” said Chris Vella, Global Director of Research for Northern Trust’s multi-manager investment solutions business, in a statement. “Although their general outlook remains favorable for the remainder of the year, the mixed signals coming from the economy seem to have slightly recalibrated their expectations.”

The study revealed that despite the higher aversion to risk in the second quarter of 2011, nearly three-quarters of respondents had positive views on the outlook for job growth and a majority expect corporate earnings to continue growing in the short term.

Other major findings from the survey include:

• 37% of managers believe emerging market equities are fairly valued, up from 27% in the first quarter.
• 50% of managers think that home prices will decline over the next six months, an increase of 8% over the prior quarter and the highest level since the second quarter of 2009.
• 30% of managers said their commodities exposure was lower in the second quarter compared to the first quarter. There was also a 17% decrease in the number of managers whose commodities exposure increased. These two data points may signal concerns of slowing demand for commodities and slowing global economic growth. They are also likely tied to lower expectations for inflation.
• Managers identified technology, consumer discretionary and healthcare as the three most attractive market segments for investment during the second quarter.
• Despite having a lower tolerance for risk, the vast majority (72%) of investment managers did not change their portfolio’s concentration during the quarter.

Furthermore, the study found that managers remain positive regarding US market valuations, with 59% of managers noting that the US equity market, as measured by the S&P 500 Index, is undervalued. On the international front a majority of managers find the  Japanese equity market attractive.

The study is based on responses from about 100 institutional managers polled in mid-June, who were asked their expectations for job growth over the next six months.