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Liability shortfall still drives "significant" investment strategy changes

11 June 2013

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Major changes in investment strategy are still being driven by a liability shortfall, a new survey has revealed.

According to data from the Durable Portfolio Construction Research Center of Natixis Global Asset Management, 86% of UK institutional investors, including pension funds, believe their peer group is not in a position to meet their liabilities.

The study revealed that 76% of those surveyed continue to predict that there will be difficulty in funding long-term liabilities, and 89% said it will be difficult to mitigate the impact of market volatility.

As a result of the liability shortfall, 83% of investors support a need to replace traditional diversification and portfolio construction techniques with new approaches to achieve results.

Terry Mellish, head of UK/Ireland business and global consultant relationships at Natixis Global Asset Management, said: "The problems of institutional investors meeting liabilities and managing volatility are enduring.

"What is new is a broader approach to achieving diversification through alternatives, not only embracing private equity and property for example, but also infrastructure related investments in a search for yield."

Of those who participated in the survey, 61% believe that it is essential to invest in alternatives to diversify portfolio risk, and 65% said they would do this over the next 12 months.

And in a welcome response to the Government's initiative to encourage greater infrastructure investment, 43% will increase their allocations to real estate investments and 30% will increase their private equity holdings this year to provide a stable, inflation-linked stream of income.

More than 500 senior decision-makers for institutional investors that collectively manage more than $11.5tr in assets took part in the study, which was conducted by UK-based CoreData.

The study revealed that institutions are embracing strategies to limit exposure to market volatility, with 76% intending to add these to their portfolios over the next 12 months, and 70 % of investors said they would also use absolute return strategies over the same period.

More than 90% of investors also agree that low yield and weaker returns pose the biggest portfolio risks, and this is believed to be the real root of the problem today.

Even though more investors are looking into alternatives, 27% predict that global equities will perform the best in 2013, with 58% said they were planning to increase their allocations as a result.

Emerging markets are also of interest as 46% of those surveyed said they would add to their emerging market equities allocation and 44% said they would increase their exposure to emerging market debt.

The survey also revealed that 79% of investors said that criteria measuring ethical and socially responsible investing have an influence on their decision-making and 32% expect to increase their allocations to socially responsible fund over the next three years.

The survey was part of a global study, which included 19 countries throughout the Americas, Europe, Asia and the Middle East.

European investors provided some similar responses to the UK investors, as 68% of them expect difficulty over the next three years in funding long-term liabilities and 70% agree that traditional approaches to portfolio construction are no longer the best way to pursue returns and manage investment risk.

European investors are also embracing alternatives with 64% stating it is essential to invest in these strategies to diversify portfolio risk.

Regarding growth assets, 60% said that they are planning to increase their global equities allocations and 50% are looking to increase their emerging market equities exposure.

First published 11.06.2013

monique_simpson@wilmington.co.uk