Asset AllocationNovember 13, 2023

Allocators Increasingly Shying Away From Risk, Survey Says

Almost half are slowing and one-third are lowering exposure to stocks and other risk assets, per CoreData.

Reported by Larry Light

Given high interest rates and inflation, de-risking is the order of the day among allocators, according to a survey by CoreData Research. In other words, allocators are edging away from stocks and other risk assets.

After polling 100 U.S. institutional investors in September, the London-based firm found that 44% are slowing new investments into risk assets, and 30% are reducing their exposure. Only 35% are bullish on U.S. stocks over the next three months. The S&P 500 had a bad 2022, recovered in the first half of this year, then began dipping again in August (although it has ticked up thus far this month).Instead, allocators are seeking risk-free yields: 43% have increased strategic allocations to government bonds or cash-like vehicles. That makes sense, as fixed-income yields nowadays are far above the near-zero level they inhabited before the Federal Reserve began tightening last year, up to 5.5%, the highest level on the Federal Reserve’s current federal funds rate range.

“These results show that 5% risk-free yields have completely changed the calculus for institutional investors,” said Michael Morley, U.S. research director at CoreData, in a statement.

The survey found that fixed income (50%) is seen as the top asset class for risk-adjusted returns over the next year. The backdrop here is that 77% think interest rates and inflation will remain elevated in that span, up from 65% in Q2. Although the survey did not define “risk assets,” the commonly accepted definition is stocks, although commodities, high-yield bonds and currencies often fall into that classification.

The poll’s risk-averse sentiment reflects an ongoing trend, at least among company pension plans. In the corporate defined benefit plan realm, de-risking has been the recipe for some time—usually meaning moving away from stocks.

In 2005, the average company DB equity allocation was 60%, with 30% in fixed income and 10% in alternative investments (hedge funds, real estate, private credit, private equity and the like), Milliman data indicate. By 2022, that mix changed a lot. Equities had slipped to 25%, and fixed income had increased to 51%, with alts claiming 24%.

Public pension funds, at least as of last year, have had a persistent tilt toward stocks. According to Boston College’s Center for Retirement Research, equities as of 2022 remained the largest asset class, at 43%—with fixed income at 21% and alts at 36%. Among alts, private equity in particular has been gaining ground on the more traditional classes.

Meanwhile, the survey showed that 38% of respondents said their organization is unloading active strategies that have failed to perform over the last few years. Active management usually is concentrated on stock picking. Still, a majority (54%) retain confidence in an active strategy and think it will deliver strong returns over the next year.

Allocators have increasingly favored index investing. Prime example: the California Public Employees’ Retirement System, which has about 70% of its liquid securities passively managed.