Since the outset of the global financial crisis, institutional investment policy and diversification have come under increased scrutiny in an attempt to protect assets in the event of another downturn. Moving away from equities, liability driven investing and increased alternative investments have all been put forth to that end. So how has investment strategy changed since the end of 2008? Not much, according to a Conference Board report.
The 2009 Institutional Investment Report suggests that institutional investors have remained fundamentally committed to the same investment policies they were adopting prior to the credit crunch.
The report indicates that at the end of 2008, when measured as a percentage of outstanding U.S. financial assets, institutional assets had reached the lowest level since 1980, or 15.8%. Reported losses—across virtually all asset classes—stood at 21.3%, or US$22.2 billion, a level similar to what was recorded in 2004.
However, despite heavy declines in their equity portfolios, institutions still own a large majority of top American businesses. In addition, at the close of 2008, as a result of stock market correction and the 45% median loss suffered by their equity portfolios, mutual funds were reporting much more balanced asset allocations.
Fixed income portfolios were also relatively unchanged from the prior year although variations in bond allocations registered for some institutional investor categories. For example, open-end investment companies, for which bond investments went from 28.1% of the aggregate market value of their portfolio in 2007 to 41.9% in 2008, and pension funds, for which bond investments went from 19.3% in 2007 to 25.8% in 2008. These shifts, explains the Conference Board, were driven by the decline of the stock market rather than changes in investment policies.
Institutional investors also remain committed to alternative investment strategies, with a “large foray into hedge funds seeking higher returns and reduced volatility to meet actuarial projections.”
“For decades, institutional investors had been shifting their allocation preferences from fixed-income securities into equity,” says Matteo Tonello, associate director of corporate governance at The Conference Board. “Then last year came, and it had a devastating effect on institutions’ expanded equity portfolios. By the end of 2008, institutions had only 36.6% of their assets in equities, down from 47.2% at the end of 2007. And yet these revisions appear to have been driven by market declines rather than by changes in investment policies.”
Mutual funds also remain major investors in non-U.S. securities, driven by the growing demand for diversification. In 2008, total assets held in foreign securities by the 25 pension funds with the largest foreign allocations amounted to $206.9 million, compared with $210.3 million of total equities held by the 20 largest mutual funds focusing on international investment strategies.
Overall, declines in capitalization were relatively uniform across the institutional investor spectrum, with no significant changes to the share of total institutional assets. Pension funds held the most, at 38.6% of total institutional assets. Mutual funds were hit the hardest—due to a combination of market decline and capital withdrawals—with outflows totalling $2.5 billion for the year, or 30.7% of their 2007 asset value. Pension funds lost 24.1% of their 2007 asset value, while insurance companies experienced a 7.8% contraction.