Study: Despite Financial Crisis, Institutional Investors Retain Appetite for Innovation

(June 27, 2011) — While innovation is perceived as having had mixed results over the last decade, asset owners have retained an appetite for innovation, according to an annual, independent study by CREATE-Research, commissioned by Citi’s Global Transaction Services and Principal Global Investors.

“The global economy is still in a state of uncertainty and strong headwinds in the shape of financial regulation, scarcity of talent and revised client expectations are buffeting the industry,” Prof. Amin Rajan, CEO of CREATE-Research and the study’s author, said in a statement. “Against this backdrop, there has to be a clear line of sight between innovations and client needs. Asset owners will demand creative solutions which deliver tangible value. New products developed without such fundamentals and without clear client engagement will struggle to gain traction.”

Barbara McKenzie, Chief Operations Officer of Principal Global Investors, added: “The report explains that innovation must be redefined to match new client circumstances. As a multi-asset class, multi-boutique organization; Principal Global Investors is well positioned to address the growing demand from clients for more customized investment solutions. We have sophisticated sales and relationship management teams globally to spot trends and fill needs.”

According to the study, about 35 innovations saw significant adoption in the last 10 years. Specifically, 57% of respondents said that emerging markets equities delivered most value while leverage recorded the worst performance, according to 40% of respondents.

Schemes also welcomed new asset allocation techniques, according to the study, including exchange-traded funds, liability-driven investment, and the use of derivatives to hedge out unrewarded risks. However, leverage, structured products, portable alpha, and currency funds were perceived as lacking intrinsic value.

A major cause of failed innovation, the study found was lack of client engagement. A total of 73% of pension funds surveyed are only rarely/occasionally engaged when asset managers innovate their financial products. Meanwhile, 88% of asset managers foresee further product innovations over the next three years.

The study — entitled Investment Innovators — surveyed more than 500 respondents from pension plans, asset managers, consultants, administrators and distributors from 30 countries with a combined assets under management of over $29 trillion.

Earlier this year, a report from the Pacific Investment Management Co. (PIMCO) criticized financial innovation. In a report titled “Devil’s Bargain” PIMCO head Bill Gross blamed financial innovation, such as securitization, for contributing to the financial crisis, urging investors to analyze other yields and assets. “Fifty years ago, the highest paid and most prestigious professions were that of a doctor or a 707 airline pilot who flew the ‘golden’ route from Los Angeles to Honolulu,” he wrote. “Today the yellow brick road begins on Wall Street or the City…the money is made from securitizing things instead of booting and rebuilding America. The tallest buildings in almost every major city are banks, with tens of thousands of people shuffling and trading paper for a living.”