Rethinking Asset Allocation

Pyramis survey finds plan sponsors changing course.

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two road uncertain directionPension fund managers are concerned about their long-term returns, with 40% of Canadian institutional investors surveyed in the 2012 Pyramis Global Institutional Investor Survey saying they don’t think they will meet their annualized target returns over the next five years. To battle this, plan sponsors are becoming more tactical when it comes to their portfolios and are rethinking their asset mix.

Increasing risk

Thirty-eight percent of respondents said they are increasing their use of illiquid assets, which Derek Young, president, global asset allocation, and vice-chair with Pyramis Global Advisors, says is an indication that they are looking for more transparency. Twenty-nine percent are increasing their use of more aggressive sub-asset classes, 22% are increasing their use of liquid alternatives, 18% are allowing more flexible mandates, 15% are increasing their risk within an asset class, and 15% are increasing their use of concentrated equity strategies.

Although people are “reaching for risk” to increase their returns, says Young, they are being smart about it. Forty-eight percent of plans say that, in the last three years, they have increased the frequency at which they conduct and review risk measures, and 11% have purchased a better risk management system. “Gone is the set-it-and-forget-it state of mind; now it’s buy and review,” says Young. “If you are taking more risk, you need to review it more often.”

Asset mix

Pension fund managers across the globe, but Canadians in particular, are very open to rethinking the traditional asset allocation model (i.e., allocation by asset class). When asked, 52% of all respondents (including those from the U.S., Europe and Canada) said yes, they were rethinking the traditional asset allocation model, but of the 52%, 79% of Canadian investors said the same. “There is no downside to re-evaluating what you are doing,” says Young. “I think it’s a positive move.”

New views

And, following this trend, many plan sponsors feel that new investing techniques are the way of the future. Forty-three percent said that new asset allocation models would be the likely future for pensions.

New models would include the following:

  • factor-based (19%);
  • alternative (12%); and
  • absolute return (11%).

However, most felt that the traditional models would still dominate, with 26% of global respondents saying that a fixed income/immunized model would be the most likely future for pension allocation; 19% said it would be the traditional 60/40 mix, and 12% voted for the global model (equity and fixed income).

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