Almost half (46%) of the pension funds in our asset allocation survey expect an increase in their equity exposure in the next twelve months, a significant jump from the one-fifth (19%) of respondents who expected a similar increase in our last survey. The S&P lost 17.6% of its value from October 31 to March 31, yet a dizzying rally in the past five weeks may have persuaded pension funds that the bear may be returning to its den, or is at least, entering a period of hibernation. Our results show a smaller percentage of funds who believe their equity exposure will continue to drop: thirty five percent of funds expect a decrease in the value of their equity holdings compared to 37% last autumn. Only nineteen percent of respondents do not expect to see much change in their equity exposure within a year.

We also ask if pension funds plan to increase their reliance on consultants regarding manager selection. Thirty-one percent of respondents say they will, compared to 30% in October when our first survey was conducted. In addition, only 3% of funds now plan to reduce their reliance on consultants for manager selection versus 7% in the autumn. In other findings, a majority of pension funds (61%) say the crisis has caused them to review investment managers compared to 77% last autumn when the crisis was in full swing. Separately, we ask if the crisis will prompt pension funds to review their investment policy and asset allocation. A majority of funds (60%) say they will, with 61% planning to do so in the next six months. 

Research for the survey was undertaken in March 2009. Our questions were sent to a representative sample of 60 plans: 52% of them are based in Europe and 48% in North America. Within Europe, 46% of respondents are based in the UK, 19% in Germany, Austria and the Netherlands, 19% in Norway, Sweden and Finland, 10% in Italy and 6% in Switzerland. About half of all respondents (51%) are corporate funds, followed by public pension plans (32%), foundation & endowments (10%) and insurers (7%). In terms of AUM, plans with more than €1-2bn account for 27% of respondents, the largest category in the group. Plans with 0-€500mn in AUM account for the smallest segment whereas they represented the biggest in our autumn survey.

Assets under Management

Source: bfinance

Overall, 44% of funds saw their asset allocation to fixed-income increase during the five-month period between the two surveys. Declining equity valuations was a central factor in growing fixed-income weightings. When asked if funds expect a change in their bond allocations within a year, two camps emerge: 25% expect an increase in their bond exposure compared to 42% who see a decrease. Five months ago, only 30% expected an increase, yet a much smaller group, 11%, expected a decrease in their bond holdings.

A number of factors could impact pension funds’ views regarding bonds this year. With the Federal Reserve’s Zero-Interest-Rate-Policy in full force and government bond yields at historical lows (as pension fund liabilities painfully reflect), some respondents believe rates have largely bottomed. Government bonds out-performed other asset classes in 2008 during a period of de-leveraging. The question some plans are now asking is whether the de-leveraging process is mostly behind us. Clearly, pension funds’ decisions whether to increase or decrease their bond holdings will impact the size of their liabilities so that a rise in rates is not in itself a bad omen for funds that plan to increase exposure to fixed-income.

There may be other reasons as to why a third of our respondents expect their bond allocations to drop: this may reflect a simple increase in the value of their equity assets and/or a drop in the value of their bond investments should interest rates rise (though this would be welcome news on the liability side of the equation). Within the fixed-income category, many of our mandates show pension schemes are also keen to commit to corporate mandates to take advantage of historically wide spreads. Twenty-five percent of respondents expect an increase in their fixed-income allocation compared to 30% several months ago. High grade bond funds saw inflows averaging $2.3bn per week in March. They have seen total inflows of $32.8bn year-to-date, according to JP Morgan Chase. High yield mutual fund inflows reached $10.3bn versus $814m of outflows during the same period last year.

The fallout from last autumn’s crisis fuelled disenchantment with active management, sparking a debate about the ability of managers to outperform their benchmark. The debate often forgot to mention that many of these active managers actually achieved relative out-performance compared to the broader indexes such as the S&P which lost 35.6% in 2008. As investors withdrew a record $152bn from hedge funds in the fourth quarter, we asked pension funds in October to offer their views on active management and FoHFs. At the time, 41% of respondents said they planned to decrease their reliance on active management. This disenchantment has reversed course, with only 24% now saying they plan to decrease reliance on active managers. Fifty-six percent of respondents plan no change, while 20% plan to increase their reliance on active management. The findings reflect the partial recovery of the equity markets giving a boost to active managers.

Over the coming months, will you reliance on investment consultants

for Investment Portfolio and Asset Allocation: 

 Source: bfinance

The extraordinary events of 2008 were not without impact on hedge fund returns (in spite their relative out-performance), with FoHFs losing 17% in 2008, posting their worst annual returns since Edhec began keeping records in 1997. With the volatility of strategies also on the rise, only 11% of surveyed schemes expect an increase in FoHF exposure, while 11% expect to see a reduction, 26% plan no change and 53% having no exposure. Last autumn, 15% expected to see an increase in FoHFs, 15% a decrease, 26% planned no change and 44% had no exposure.

A somewhat higher percentage of investors expect to see an increase in their exposure to private equity (PE), GTAA, currency, commodity, portable alpha, SRI, infrastructure and property compared to our first survey. As the secondary pricing outlook for private equity funds fell substantially in the second half of 2008, a number of funds plan to increase their allocation to the segment. Indeed, in the past five months, private equity and infrastructure experienced an increase in exposure and little (private equity) or no reduction (infrastructure). We caution once again that this may be the result of dislocations caused by a steep decline in the value of equities and not inflows into these segments. Finland’s Etera, for example, has seen its allocation to infrastructure grow from 12% two years ago to 18% today. Most of this increase is a reflection of the steep losses it suffered on equities, says Kalevi Hemila, Managing Director at Etera, yet it recently invested €30m in two infrastructure funds, Icecapital and the Macquarie Group. Looking ahead, the respondents reserve their most favourable outlook for equities. They are also more favourably disposed toward absolute return strategies (many of which are actively managed) than several months ago. Finally, the crisis seems to have cemented pension funds’ desire to diversify, with more than half (54%) saying yes and only 5% saying no with 41% unchanged. These last figures are broadly in line with five months ago. 

How is your exposure to the following asset classes likely to change within one year?

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 Source: bfinance

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