The Markets January 12, 2009

Fund Managers Optimistic, but Concerned about Retirement Income

The top concerns of fund managers during the next 10 to 20 years focus on inadequate retirement incomes from defined contribution (DC) plans for large segments of the population and greater regulation costs, according to a Watson Wyatt survey.
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However, for the immediate future, fund managers have a generally optimistic outlook. In fact, surveyed fund managers predict that markets in most regions will begin to recover this year, according to a release of the survey results.

Fund managers expect to see their institutional clients opting for more conservative investment strategies and prioritizing greater risk control as the main areas for improvement in their governance, according to Watson Wyatt.

The consulting firm said the global survey of fund managers, who collectively have assets under management of over $10 trillion, also indicated that:

  • The period of recovery in most markets will be protracted.
  • The influence of hedge funds and investment banks will decline significantly while that of pension and sovereign funds will rise.
  • There will be continued growth in demand for alpha from investors.
  • The U.S. housing market will begin to recover by the third quarter of this year, about the same time as the start of a recovery in the other main markets.

Managers’ top three tools required for investment success in 2009 are: adequate risk controls, portfolio diversification, and added value through active management. They expect that the top issues raised by their clients will be risk management, asset allocation, and underperformance.

“While the long-term effects of this global crisis will take some time to manifest themselves, it is crucial for investment professionals to think ahead, so as to develop and implement winning strategies that add value for their clients in an increasingly unpredictable and competitive marketplace,”  said Carl Hess, global head of investment consulting at Watson Wyatt, in the release. “The views expressed by this influential group give us some valuable insights into how, why and when key investment decisions are made.”

Bonds, Equities

According to the survey, managers hold overall bullish views of returns on public equities, investment grade bonds, high-yield bonds, and emerging markets over the next five years. However, for the same time horizon, they hold fairly bearish views of returns on hedge funds, government bonds, money market, and real estate. They are largely neutral on private equities and currencies.

Regarding equities, respondents expect stock markets to revert to historical return levels by 2012, while predictions about returns in 2009 vary significantly by region. According to the median view of managers, anticipated returns on global equities in 2009 are 6.7%, and they have more optimistic views for the U.S. (8.8%). The survey also shows expected equity volatility for 2009 in the elevated range of 20% to 25%, which is higher than the historical average but lower than that experienced during 2008.

Real yields on government securities, both short- and long-term, are likely to remain low and comparable to the depressed levels of late 2008, fund managers reported. However, as the global economy recovers more fully by 2012, government yields are expected to increase while corporate spreads shrink correspondingly – the shift will be in a 100 to 200 basis point range and will take three years to complete.

“Not unlike the views expressed by some of these investment managers, we have great expectations that the trauma of the past 18 months will have a positive and lasting influence on institutional fund investing, if some lessons are learned,” Hess added. “Chief among these would be: Pension plan investing really is a long-term game and that investment behavior should genuinely mirror this; that the governance capability of a fund should determine the sophistication of its investment strategy; that risk is multi-faceted and deserves multiple metrics for its measurement and monitoring; and that alpha will always be in short supply and only reliably available to the very best investors. Regardless of managers’ optimism, which is an enduring characteristic of the industry, I think it will be lessons like these, put into practice in 2009, that will give pension plans the edge they need in a fast-changing, competitive investment world.”

Watson Wyatt’s Global Survey of Investment and Economic Expectations was conducted in November and December 2008 and includes responses from 104 global investment managers.

 

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