Opinion: What 2012 Will Bring for Pensions, Endowments, Foundations, and Other Institutional Investors

The coming year will see asset owners split into two groups: those that remember the problems of the crisis and act to resolve them, and those that forget them and fail to act.

(January 2, 2012)—Unlike the editors at Time (Year of The Protestor? Blah), I’m going to be bold. No “on the one hand, on the other hand” arguments will be made here. Instead, here is what I think will happen in the next 365 days. Feel free to argue, discount, or bet the house on it.

Unlike 2011—which I labeled the Year of Stasis—I think 2012 will be as dynamic a year as we have seen in the institutional investing space. This is because economic indicators coming out of the last two months strike me as positive compared to the three years that preceded them. Consumer confidence is up sharply. Housing sale contracts are up sharply. Employment figures—even taking into account that many people stopped looking for work altogether—were more positive than almost everyone thought they would be. The European debt crisis, although limping along, looks to be stabilizing—European governments seem to be looking through every possible solution, and will eventually, I believe, find one that is palpable (it is this prediction that I am most shaky on, however).

The result: Markets will stabilize. Interest rates will rise ever so slightly, although not to any significant degree. Global growth, including that of America, will be good, not great. In short—things will be calm and relatively strong, and we’ll like it.

The result for the global institutional investing community is that we will see asset owners split into two groups—those that take advantage of this opportunity to act on the concerns of the past three years, and those that forget them.

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As markets calm and rates rise slightly—improving funding ratios at corporate pension plans—smart funds will move into liability-driven investment solutions, or execute a pension buyout/buy-in. But some asset owners will forget that they don’t like volatility in their pension funds.

As many institutional investors look back and realize they don’t want to manage these assets—it’s not a core competency for many of them, after all—many will outsource some or all of their investment management, especially in the alternatives space. Consultants will want these assets as they expand their business models, and on the back of strong relationships with clients will gather some, but I suspect boutiques and established players will win relative to others. But some asset owners who aren’t committed to asset management will nevertheless forget that they aren’t that good or interested in managing these assets, and will continue to try to do it all themselves.

As investors look back and remember the painful drop in assets that they invariably experienced, many will pursue dynamic asset allocation, risk parity, tail-risk hedging, and other forms of real or perceived risk management solutions. But some will forget just how painful it is to endure sharp drawdowns in assets.

Finally, a certain set of asset owners will increasingly think of transition management, FX, and securities lending—often thought of back-office/insignificant decisions in the past—as they do other investments. If they don’t, they will continue to be taken advantage of in the pricing of these products, and they will be embarrassed when overcharging (alleged or otherwise) is brought to light. But some will forget the problems, and are bound to repeat them.

I could be proven wrong. Markets could continue to muddle along, or collapse altogether. The majority of institutional investors could forget how horrible 2008/2009 was, and fail to act on these concerns as markets improve and provide the opportunity for action. But I’m an optimist. The economic problems of the past three years are manmade, and they can be solved by man. The problems faced by institutional investors in the past three years are manmade, and they too can be solved by man. The year just begun will be the year where we do just that.

According to State Street Global Markets, European institutions increased their allocations to risky assets in December, while North American and Asian institutions did the opposite.

(December 29, 2011)—Perhaps counter-intuitively, European investors gained confidence in December while North Americans lost it, according to State Street Global Markets (SSgA).

The State Street Investor Confidence Index—which measures investors’ “risk appetite quantitatively by analyzing the actual buying and selling patterns of institutional investors”—collectively fell to 99.3 on the month, down 0.1 from a revised November figure of 99.4.

According to SSgA, the confidence barometer looks at institutional holdings of equities; the greater allocation to equities, the higher the confidence, the logic being that if investors are willing to hold relatively risky assets, their confidence in the investing environment is greater. A reading of 100 is neutral, meaning that investors neither are increasing nor decreasing their allocations to risky assets.

Geographically, the breakdown was as follows: Among North American investors, confidence fell 2 points to 96.4; among Asian investors, the barometer fell 1 point to 93.7; among European investors, the index shows an increase in confidence of 0.6 points, up to 102.2.

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“The small declines this month were offset by upward revisions to last month’s numbers. As a result, we would describe investors as being in a holding pattern,” Harvard Professor Kenneth Froot, a co-developer of the index, said in a release. “The meeting of European policy makers on December 9th did not address the over-arching questions in the minds of global investors, and they are likely looking forward to the first quarter of 2012 for greater clarity on the prospects for risk allocations in their portfolios.”

Co-developer Paul O’Connell of State Street added: “Looking regionally, European investors are more optimistic than their North American and Asian peers for the second consecutive month. This is a turnabout from the first half of the year, when European investors showed the most pessimism. It does not necessarily mean that prospects for the European region itself have improved, but it does suggest that European institutions are more willing to allocate to equities both inside and outside Europe than they were earlier in the year.”