(May 6, 2014) — Insurance CIOs anticipate increasing risk to offset low yields caused by rising interest rates and increased market volatility, according to a Goldman Sachs Asset Management (GSAM) survey.
The survey collected views of 185 CIOs, 41 CFOs, and seven individuals serving both jobs and found CIOs were most concerned about credit and equity market volatility. More than 40% of those surveyed believed that the investment environment was getting worse, higher than the 33% who thought it would stay the same and the optimistic 25% who believed it would improve.
Almost half of the CIOs surveyed said they believed low yields to be the greatest portfolio risk, a slight decline from last year’s 52%. In order to produce enhanced portfolio returns in such environment, CIOs said they will turn to less liquid assets such as alternative and equities.
According to the survey, 35% of CIOs said they intend to increase overall portfolio risk and decrease portfolio liquidity. When asked to identify the most effective strategy to produce better returns, 46% of insurers chose allocating to less liquid asset classes and 43% said to equities and/or alternatives.
In line with these results, 26% of surveyed CIOs were most optimistic about private equity returns over the next 12 months. More than 40% said private equity offers the “single most attractive” illiquidity premium.
On the other hand, 30% said government agency debt would deliver the lowest returns of all asset classes. Almost half of CIOs also believed investment grade corporate bonds and high yield corporate bonds were overvalued. Nearly 60% of CIOs predicted the 10-year treasury yield to be 3% to 3.5% at year-end while a whopping 75% believed the S&P 500 will produce a total return between 0% to 10% in 2014.
“Insurers remain focused on the search for return, but view corporate bonds and public equities as either overvalued or fairly valued,” said Michael Siegel, GSAM’s global head of insurance asset management. “This is driving CIOs to explore non-traditional asset classes that can offer higher total return potential and compensation for illiquidity.”
GSAM’s survey revealed that in future asset allocations, CIOs showed intention to increase net allocations to infrastructure debt, private equity, commercial mortgage loans, and real estate equity.
“Against a backdrop of low yields and growing concern about monetary tightening, CIOs are planning to increase allocations to less liquid assets, alternatives and equities—rather than increase credit risk or lengthen duration—to bolster potential investment yields and returns,” Siegel said.
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