Confidence has returned among institutional investors worldwide.
Nine in 10 (91%) pension plans and other institutional investors believe they can achieve target returns in five years, significantly higher than the 65% reported in 2012, according to the 2014 Pyramis Global Institutional Investor Survey.‘
“It is clear globally that after the past couple of years of strong returns, lower volatility, equity markets and good manager selection, most institutional investors are pretty confident they can achieve their target return,” says Pam Holding, chief investment officer at Pyramis Global Advisors.
“And that’s particularly striking in Canada. Ninety-six percent of Canadian plans say they’ll achieve their target return over the next five years. That’s encouraging from my perspective.”
Outside the U.S. and Canada, volatility expectations over the long term are quite low with a decrease in the frequency of boom/bust cycles expected in Asia (91%) and Europe (79%). Only 7% of U.S. institutions expect volatility to decrease, while 42% expect an increase in volatility. This trend continues across North America with only 10% of Canadian plans expecting a decrease in volatility, while 60% foresee an increase.
While market volatility remains a top concern in Europe and Asia, U.S. institutions are expressing less worry about capital markets than years past. Europe also remains concerned about a low return environment, while Asia is focused on regulatory and accounting changes and Canada is focused on risk management. The top concern for U.S. plans is current funded status (28%), with a majority of pensions intending to improve it.
When asked which investment approaches are most likely to underperform over the long term, 31% of U.S. respondents cite hedge funds as least likely to meet expectations. Risk factor investing is expected to be the biggest disappointment among Canadian, European and Asian plans.
On average, primary investment objectives among global institutions lean toward growth, but results vary considerably by geography. Asian institutions are overwhelmingly focused on growth, with 64% listing capital growth as the primary investment objective.
For plans in the U.S., funded status growth is the primary investment objective, but levels differ among public plans (62%) and corporates (37%). Plans in Europe are primarily focused on preservation, while Canadian institutions are equally focused on preserving and growing their funded status.
A global view of the survey results shows plans are seeking investment opportunities over the medium term predominantly in emerging Asia. However, a regional breakdown reveals a geographic tilt.
Seventy-one percent of plans in Asia cite emerging Asia as the top medium-term growth prospect. U.S. and Canadian plans favour North America (34%) and emerging Asia (32%). European plans favour North America (33%), emerging Asia (21%) and developed Europe (19%).
There were 811 participants in 22 countries representing more than US$9 trillion in assets that took part in the survey.