Wondering what the investing trends are for this year?
Sean McCoy, senior consultant with InterSec Research, looked at what institutional investors are considering for their in portfolios at the CPBI’s Pension Investment Forecast earlier this week.
In 2006, pension plans allocated 50% of their portfolios to equities, with 40% of that being U.S. equities. By 2012, equity allocation was 40%, with U.S. equities 20%. McCoy said it’s tough to say what the call will be on this asset class will be for 2013.
But while there has been an overall drop in equities as whole, McCoy said he has seen growth in global and emerging market equities.
There has also been an increase in alternatives and fixed income. Assets have shown strong flows in global fixed income over the last five years—global fixed income brought in $20.2 billion. By 2014, McCoy said, there will more allocation to global equity (which brought in $30.4 billion) and emerging market debt.
Active and overweight
McCoy said that there has also been a move to passive investing—within equities. “Since 2008, there’s been a huge pick-up of passive flows in international and global equity combined.”
But active investment has been positive for global equity—even median investment managers are adding value over the benchmark net of fees, he said.
Active management is strongest in international equity, international small cap equity and emerging market small cap equity.
In PIIGS (Portugal, Ireland, Italy, Greece and Spain) global managers have taken an overweight position in the global universes, but they have been adding value through stock selection.
Emerging market exposure has also been in an overweight position over the last few years but has also added value to institutional portfolios. Institutional investors have not been overweight in emerging markets, but are increasing their exposure significantly—in 2006, exposure was less than 1% of total plan assets; today, it is close to 3%.
McCoy said emerging market exposure would continue to increase this year, as well as plans’ exposure to these markets.
He compared managers that have research based in emerging markets versus those with a centralized team based in a developed market, say London, for example.
“The performance was slightly in favour of those managers without a local presence in emerging markets,” he said.
Emerging market debt has seen a huge pick-up since 2008. The interest in emerging market debt was initially in hard currency, but local currency is dramatically increasing the fundings. Expect emerging market corporate debt to be on the rise in next few years, as well as interest in emerging market small cap equity.
Risk is a big theme and will continue to be so for 2013. Investors, McCoy said, are looking at lower-volatility products and benchmark-agnostic products—both products that are well positioned in down markets.