Study: Investors Are Eager to Grow Risk Appetite, International Exposure

Despite prediction of increased market volatility, a new survey finds that investors are eager to intensify their risk appetite and grow their international exposure.

(November 29, 2011) — While market volatility is expected to remain the same or increase in 2012, investors are eager to intensify their risk appetite and grow international exposure, a study conducted by Information Management Network (IMN), global organizers of institutional finance and investment conferences, has discovered.

The survey found that 71% of respondents — which included plan sponsors, endowments, foundations, health-care organizations, non-profit investors, institutional investors, and fund managers — feel more prepared to combat exposure now than they did in 2008. Meanwhile, 62% of survey respondents use alternative assets citing a combination of hard assets (48%), hedge funds (36%), private equity (36%), as well as commodity futures, real estate, natural resources, and infrastructure.

In addition, most respondents said they expect that market volatility and global economic conditions will have the greatest impact on portfolio strategy (66%), followed by changing regulatory requirements (11%) and customer demand for control and transparency (5%).

“I am encouraged by investors’ willingness to increase their exposure to the market. It suggests that professional investors are able to look beyond near-term volatility and seek attractively priced markets,” said Jack Ablin, Chief Investment Officer of BMO-Harris Private Bank in Chicago, in a statement.

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The study follows an earlier report by Bank of America Merrill Lynch, which found that — driven by Eurozone turbulence — money managers are fleeing to US and emerging market equities. According to the firm’s November survey of fund managers, a net 27% of investors are overweight in emerging markets during the month, up from a net 9% in October. Meanwhile, a net 20% of investors are overweight in US equities, up from a net 6% in October. In August, the firm issued another report showing that global emerging markets have increased in popularity, as concerns about a weakening of the Chinese economy have subsided. The findings showed 19% expected the Chinese economy to weaken over the next year, down 20 percentage points from July. This improved outlook was supported by a shift toward commodities, Merrill said.

The firm’s evidence showcasing a greater attraction to US and emerging market equities follows a September report by the International Monetary Fund (IMF) that revealed that pension and insurance funds may up their allocation to equities and other riskier assets in emerging and developing countries. According to the group’s Global Financial Stability Report, historically low interest rates in industrialized markets are threatening pension plans in Canada, Germany, Japan, Switzerland, Britain and the United States. Due to the low interest rate environment of those markets, pension and insurance vehicles are being left underfunded as a result of their reliance on traditionally safe investments, which are yielding little or nothing.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742

UK Government Targets Pension Funding for Infrastructure, Consultants Express Hesitation

UK Chancellor George Osborne has announced that a total of £6.3 billion of public money and up to £20 billion of private funding from pension funds will be invested in infrastructure projects, and while consultants generally commend the decision, they also express skepticism.

(November 29, 2011) — The UK’s Chancellor of the Exchequer George Osborne has announced a £30 billion plan to build roads, railways, power stations and schools, with the Government set to provide only a third of the investment — £5 billion by 2015.

Future infrastructure projects are scheduled to be funded by an ‘investment platform’ — a joint venture between Government and private funds. After 2015, the Government is scheduled to invest another £5 billion for longer-term projects over the following five years. The remaining portion of the infrastructure investment will come from institutions, such as pension funds.

Osborne said in his Autumn Statement: “We need to put to work the many billions of pounds that British people save, in British pension funds, and get those savings invested in British projects. You could call it British savings for British jobs.”

On the announcement that the Government will unlock £20 billion from pension funds for infrastructure investment, Colin Robertson, global head of asset allocation at Aon Hewitt, told aiCIO in an emailed statement: “It is good to see the Government talking to pension funds about their requirements for investment. There is considerable demand from pension funds for infrastructure investments and this should be especially the case for Local Government schemes which can adopt a longer time horizon. However, pension funds must consider what is best for their scheme. They will need to take account of the illiquid nature of infrastructure and carefully assess the financial terms of the Government’s proposed investments.”

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Another consultant reiterated the importance for pension funds to consider what is best for their scheme, noting that while the relationship between local governments and pension schemes can be a symbiotic one, with the benefit of infrastructure investing equally shared by both parties, the relationship often risks being plagued by misaligned interests. “Pension funds are, first and foremost, bound by their duties as fiduciaries and as such must seek the best possible investments, balancing expected returns with potential risks,” Timothy Barron, president and CEO of consulting firm Rogerscasey, told aiCIO. “Yet, for public plans particularly, there is a symbiotic relationship with their sponsoring entity, where a healthy sponsor is crucial to the long-term viability of the plan itself. Infrastructure investing may be an example where the plan fiduciary can provide capital to support the sponsor while benefiting the plan as well—this must be determined through careful due diligence of each individual opportunity, however, and is fraught with the potential for misaligned interests.”

The UK Treasury, which is seeking £250 billion infrastructure investment over the next several years, has signed a memorandum of understanding with The National Association of Pension Funds (NAPF) — whose members have £800 billion of assets — to increase their spending on such projects. Joanne Segars, Chief Executive of the NAPF, said: “We’re excited by the Government’s commitment to try to make it easier for pension funds to back major infrastructural projects, and we look forward to working on the details with them…This could be a real win-win. The UK desperately needs to update its infrastructure, and pension funds are looking for inflation-linked, long-term investments.”

Segars continued: “Pension funds hold over a trillion pounds in assets, but only around 2% of that is invested in infrastructure. There’s the potential for that to be much higher. Infrastructure is a good fit with the needs of pension funds because projects like ports and power stations can offer a reliable return over a long timeframe.”

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742