The first half of 2009 has been a time of reflection for U.S. institutions to review their investment policies, asset allocations and investment managers, according to a recent report. The subsequent conclusions are expected to affect not only the U.S. investment management industry but also the global financial markets and millions of Americans who rely on the nation’s pension system.
Greenwich Associates’ Greenwich Market Pulse survey of 152 U.S. institutions found that while institutions are sticking with diversification strategies, they continue to reduce allocations to U.S. equities and remain committed to significant allocations of hedge funds, private equity and other alternative investments.
Corporate plan sponsors are moving to reduce the volatility of pension fund investment performance by increasing allocations to fixed income, even as they shut defined benefit plans to new employees and reduce matching contributions to defined contribution plans. Meanwhile, public pension funds are accepting greater levels of short-term volatility and lower levels of liquidity in return for the chance to make up for last year’s setbacks with strong investment returns. As such, fewer public funds are shifting assets into fixed income and more are increasing allocations to alternative asset classes with higher potential for returns.
Endowments and foundations—recently forced to sell assets into a falling market in order to fund operations and grant obligations and other needs—are revising their views on cash holdings and increasing liquidity requirements within their portfolios, according to the report. However, they are giving no signals that an investment policy rethink is under way.
Public pension funds and endowments were the first among U.S. institutions in making opportunistic investments related to the market crisis, as almost one-quarter of U.S. institutions have already made opportunistic investments in fixed income, secondary private equity and other asset classes. Endowments and foundations have led the way, with 45% of these institutions investing in opportunistic funds, followed by public pension funds at roughly one-third.
A major shift has occurred in manager selection, according to Greenwich, with more than 20% of U.S. institutions moving assets from active managers to passive strategies in the past year. However, it is not yet clear whether this move represents a temporary “parking” of assets as institutions abandon underperforming active strategies and managers or a more secular change in approach. Also, the practice of securities lending has been decreased by almost half of U.S. institutions due to the risks involved, highlighted at the outset of the global financial crisis.
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