Pension Fund Survey: Investors Move to Alts, Shorter-Duration Bonds

(July 6, 2011) — The latest investor survey from consultants bfinance shows that in the last six months, pension investors are increasingly shifting away from equity and fixed-income into alternative investments, such as real estate, private equity and infrastructure.

The study shows that 62% of respondents say they are overweight equity and 48% report being overweight cash. Despite the gradual shift from equities to alternatives in the last six months, 44% say they are underweight in both fixed-income and alternatives.

In terms of fixed-income, pension fund investors are on the lookout for bonds with shorter horizons. More than two thirds of respondents (69%) intend to shorten the duration of their bond portfolios to guard themselves against a rise in long-term rates. The reason, the report says, likely reflects uncertainty over the future movement of bond yields, fueled by the sovereign debt crisis in the eurozone coupled with worries over the United States securing bipartisan agreement to heighten the Federal debt ceiling.  

“The main rationale for investing in short duration bonds, as opposed to longer term bonds, is to make fixed-income portfolios less volatile and less vulnerable to rising interest rates and spread widening,” Mathias Neidert, deputy head of research at bfinance, tells aiCIO. “This strategy is particularly relevant when investing in the high yield space, where the market tends to overreact to any hint of default rates going up and spreads can shoot up,” he says.

According to the report, institutional investors’ main concerns over the next 12 months regarding their bond holdings remain volatility and credit risk. Farther down on their lists of concerns are rising inflation  and long-term rates.

Despite the Fed’s efforts to quell fears over inflation, investors have continued to voice concerns over inflationary pressures. In the UK, an April survey of 64 European pension schemes with more than $426 billion (€300 billion) of assets showed that inflation is the most pressing concern for investors, with 92% of respondents citing it as a slight concern or a serious worry. In the US and Canada, a heightened focus on inflation is reflected by an annual survey from Casey Quirk & Associates and eVestment Alliance of investment consultants, which revealed that alternatives, emerging markets, and strategies that provide a hedge against inflation are expected to dominate 2011 search activity. The study showed that half of those surveyed expect an increase in institutional interest in inflation hedging strategies this year. “One of the more interesting findings in this year’s consultant survey is the rising interest in private equity and real assets,” noted Casey Quirk Partner Yariv Itah in a statement. “Institutional investors increasingly manage toward outcomes rather than just excess return, and they want asset managers who can use illiquid investments to mitigate inflation risk and manage liabilities.”

Meanwhile, the recent survey results from bfinance show that nearly twice as many respondents expected inflation to spiral in the future, compared to those who thought inflation will be contained in the future. In the next six months, a total of 42 % of investors intend to increase investment in hedging assets against inflation, while only 4% plan to reduce them.

In terms of asset allocation decisions made by investors to guard their portfolios against future inflation, inflation-linked bonds are most widely used, followed by real estate and infrastructure. Structured products are cited only by 2% of respondents.

The study analyzed responses from 50 international pension funds cumulatively worth $283 billion which were surveyed by bfinance during the second half of June.