Fund Managers Optimistic About Equities, Alternatives

Towers Watson's Global Survey of Investment and Economic Expectations found pension fund managers anticipate fairly conservative investing approaches, but optimism remain optimistic about the years ahead.

The survey found fund managers continue to be optimistic about long-term investments in equities and alternative assets, but remain uncertain over the outlook for global economic improvement this year and are concerned over returns from government bonds.

“We believe equities will provide reasonable returns as easy monetary policy and mediocre growth combine to offer a relatively supportive environment, although valuations will vary across markets,” said Matt Stroud, head of delegated portfolio management, Towers Watson. “Short- to medium-dated sovereign bonds will provide reasonable returns as priced-in cash rates continue to be revised lower. Conversely, credit markets appear vulnerable to downside economic risks from an economic perspective, and from creeping leverage and weaker underwriting standards. Low starting yield spreads fail to provide much cushion against anything other than a benign outcome.”

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When asked to identify their most critical investment issues over the next five years, six in 10 (61%) respondents cited government intervention, including monetary, fiscal, legislative and regulatory measures. More than four in 10 (42%) identified global economic imbalance as a critical issue, followed by inflation (35%). Managers also identified asset allocation and risk as the two most critical issues facing their institutional investor clients.

Fund managers’ ongoing uncertainty over the world economy is affecting how they view portfolio positioning over the next year. According to the survey, only one-quarter (25%) believe the investment strategies of their institutional clients will become more aggressive this year, a sharp drop from 44% who said the same last year. Conversely, more than one-third (34%) believe their clients will invest more conservatively, an increase from 29% in 2014.

Last year, managers in most markets projected better equity returns. This year, expectations are sharply divided by market. Managers expect equities to deliver the strongest returns in Japan (9.0%), China (8.5%) and the U.S. (7.2%). Lower returns are predicted for Australia (4.9%), Canada (5.4%) and Switzerland (5.7%).  

The survey showed most managers remain bullish for the next five years on emerging-market equities (70% vs. 76% in 2014), public equities (73% vs. 78%), infrastructure (60% vs. 53%) and private equity (55% vs. 59%). For the same time horizon, the majority of managers are bearish on nominal government bonds (83% vs. 81%), investment-grade bonds (53% vs. 58%) and high-yield bonds (50% vs. 42%).

Nearly two thirds (61%) of survey respondents see the U.S. dollar as a rewarding investment opportunity. Managers expect the dollar to maintain its strength, demonstrating a belief that currencies will play a key role in total returns and the management of assets on the back of 2014’s currency volatility. This is consistent with managers’ expectations of monetary policy’s continued prominent role in investment analysis over the next five years.

Many managers are predicting 10-year government bond yields will rise in 2015, with predictions rising to 2.8% for the U.S. (from 2.1% as of year-end 2014), to 2.8% for the U.K. (from 1.8%), to 1.4% for the Eurozone (from 0.5%), to 3.6% for Australia (from 2.7%), to 4.3% for China (from 3.7%) and to 0.9% for Japan (from 0.3%).

“Interestingly, many managers believe the most important attribute for investment success going forward is active management. While we agree that active managers can add significant value, especially in an environment where valuations are heavily impacted by government actions, we also believe the appropriate response to an uncertain future is to emphasize portfolio diversity,” said Stroud.

Towers Watson’s 2015 Global Survey of Investment and Economic Expectations includes the opinions of 101 investment managers, economists, strategists and market analysts. The majority of respondents have institutional assets under management (AUM) and retail AUM greater than $1 billion. The survey report may be downloaded here.

How Disruptive Are Robo-Advisers, Exactly?

A recent Cerulli Associates report assesses whether eRIAs, also known as robo-advisers, could be challenged in the medium and long terms by a “first-mover effect.”

“The electronic registered investment adviser [eRIA] or robo-adviser business model presents the opportunity to bring technological upgrades to an industry hampered by legacy systems,” says Frederick Pickering, research analyst at Cerulli.

At the same time, traditional advisory firms and investment providers have asked about the potential for robo-advisers to disrupt an industry not exactly known for rapid innovation. While many see opportunities for traditional and digital advice models to work in sync, some robo-practitioners predict their firms will make the human-to-human financial advisory model obsolete.

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Pickering says the latest Cerulli reporting suggests this latter view is probably overstated.

“During the past few months, significant developments from existing direct firms have dramatically changed the eRIA conversation,” he explains. “While the low-cost business model pioneered by these firms may stick around, it is unlikely that the eRIAs will be able to compete with the low-cost offerings of the direct firms.”

For example, it caused a lot of retirement industry chatter when Northwestern Mutual announced last week that it is acquiring financial education technology provider LearnVest. This type of deal, through which a long-established investment services provider with a traditional sales, distribution and client-service structure uses its considerable scope and financial resources to purchase and integrate unique competitors, represents one of the major “threats” to the robo-adviser model, Cerulli explains.

Pickering says robo-advisers still enjoy considerable tailwinds and opportunities for success and lasting independence, but firms could be targeted for acquisition by the big players in the years ahead. Others may see their uniqueness and competitiveness fade in the face of responsive innovation.

“For eRIAs, imitation is a serious threat to their continued existence,” Pickering adds. “These firms have rolled out innovative ideas, but the existing financial services industry has ample resources available to replicate the robo-adviser business model. Previously, many robo-advisers banked on the idea that financial firms were unwilling to duplicate their model for fear of upending their revenue.”

Instead, as explained in the “The Cerulli Edge – U.S. Edition,” traditional firms are starting to respond to the “innovator’s dilemma” by building their own eRIA-type services, or by purchasing digital advice service providers that seem like a good fit with the existing sales structure.

“With increased fee compression and expanded services from the direct space, eRIAs may be forced to change their business models to become technology providers to advisers,” Cerulli concludes, similar to findings shared recently with PLANADVISER by another research firm, Corporate Insight. “The larger direct firms may replace eRIAs in the automated investment space, but the presence of eRIAs will have changed the advisory industry for the better. By emphasizing low cost and sleek technology, they have forced existing firms to take technology offerings seriously.”

More information on obtaining Cerulli research is available on the firm’s website.

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