Investors Put Bond Realignment as Primary Goal in 2014

A survey found asset owners seek to restructure their fixed-income portfolios, increase exposures to real assets, and continue to explore alternative investment options.

(February 10, 2014) — Concerned by rising interest rates in 2014, investors expect to restructure their fixed income portfolios, even foreseeing an inflow from equity commitments in the next three years, according to research.

A joint survey conducted by consulting firm CaseyQuirk and eVestment found that of more than 135 institutional investors with $1.6 trillion in total assets under management (AUM), 53% cited the end of tapering and rising rates as the key issue of 2014.

Drivers of asset owners’ behaviors were divergent, however. Corporate pensions said they seek to continue de-risking and immunize liabilities, boosted by high funding ratios. Public pensions reported focusing on raising allocations to alternatives to improve funding. Non-profit funds said they plan to continue investing heavily in alternatives to meet target returns.

Such various needs have pointed to differing changes in investment policies, the report found.

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Most pensions reported seeking to realign their fixed-income portfolios during the next three years; US investors were looking to next-generation debt strategies to generate income; and European asset owners planned to increase their exposure to alternatives and non-traditional asset classes.

Sixty-five surveyed investment consultants representing $3.7 trillion in assets under advisory said they expect a spike in appetite for real assets.

“Institutional investors of all types seek long-dated, unlisted investments that also generate strong recurrent cash flow, well-designed for liability immunization, and inflation protection,” the report said.

Along with big changes in domestic and global fixed income allocations, global equities will also experience increased interest, benefiting from the trend away from home-based portfolios, according to the consultants.

Long term, asset owners expected growing allocations to fixed income and alternatives, “mostly at the expense of benchmark-tracking domestic equities,” the report found. Passive investments were expected to remain the same in allocations during the next three years.

The survey found interest in alternatives, of various terms and types, continuing to grow among investors. Infrastructure and commodities were expected to perform well through 2016. Smaller US pensions and non-profits, on the other hand, are said to invest heavily in hedge funds and private equity.

These prospective changes in behaviors, concerns, and demand characteristics of asset owners would push asset managers to become more flexible and creative with their products and management, the report found.

“Fund managers will have to become adept at meeting the needs of asset owners seeking specific solutions, elevate their fixed-income game, and shift more rapidly to offering a globalized investment framework that incorporates both traditional and alternative skills,” said Jeffrey Levi, director at CaseyQuirk.

Managers would have to switch to outcome-oriented investing—moving away from benchmark focused allocations—create a multi-sector strategy for fixed income; help investors achieve appropriate de-risking and liability-driven investing strategies; search for more non-correlated real asset investments; and increasingly globalize portfolios.

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(February 6, 2014) – Federated Investors has hired former Broadmark Senior Managing Director Michael Dieschbourg to lead its new alternatives/managed-risk group.

Dieschbourg started as managing director and senior vice president of the Philadelphia-based fund manager on January 6.

The new unit represents a major strategic push for Federated into downside-protected and highly liquid active equities products.

“What liability-driven investing (LDI) did for fixed income, we’re going to be doing for equity allocation strategies,” Dieschbourg told aiCIO. “LDI transformed fixed-income managers, and you had leaders emerge. Like LDI, in this group we’re looking at outcomes, solving clients problems in a conservative way, and changing the definition of risk to, ‘What’s the impact on the client portfolio?’”

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Dieschbourg will oversee the development and launch of Federated’s offerings in this space. His team of 13 has been assembled from two prior divisions at Federated. Dieschbourg reports directly to Stephen Auth, CIO for global equities.

“Michael’s management experience and deep knowledge of managed-risk portfolios from both the perspective of an investment manager and as a consultant make him an ideal leader for our recently formed alternatives/managed-risk investment group,” said Auth.

The division has four products on the market and plans to expand the suite over time. All seek to minimize drawdown risk and volatility without sacrificing (too much) upside.

“We’ve had this great bull run in bond markets, which is coming to an end,” Dieschbourg said. “But growth is still important. The key is staying focused and involved in the marketplace, but not getting killed in the mean time.”

Federated managed $376 billion in assets between 135 funds and various managed accounts at the end of 2013.