Pyramis Global Advisors® Survey Finds Country’s Largest Institutional Investors Are More Aggressive in Seeking Market Opportunities

Historic change in asset allocation approach and use of asset classes

SMITHFIELD, RHODE ISLAND – Thirty-seven percent of the country’s largest pension plans and other institutional investors are rethinking traditional approaches to asset allocation in the next 10 years according to a Pyramis Global Advisors® survey of institutions around the world. These respondents oversee more than USD$5 trillion in assets.

In recent years, amid market volatility and low interest rates, 35% of respondents said they became more “tactical,” or opportunistic, in their investment decisions. Despite that, 29% of U.S. plans believe they will not achieve their return assumptions, up from 18% in 2008.

Shortening the Time Horizon, the 2012 Pyramis Global Institutional Investor Survey, reveals U.S. defined benefit (DB) plans require a median 8% annual return and, despite major changes in capital markets, this required return has not changed significantly in four years.

The Pyramis survey, now in its tenth year, shows U.S. plans are nearly equally concerned with both risk and return; 27% cite market volatility as a top concern (up from 22% in mid-2008 as the financial crisis deepened), while 26% noted the low return environment as their top concern in achieving returns. To navigate this market, 43% of U.S. institutions expect to use a more dynamic or tactical (opportunistic) approach to allocating portfolio assets in order to boost returns — compared to 3% of DB plans in 2002.

Achieving this, plans say they must:
• Conduct more frequent internal risk reviews (45%)
• Emphasize investment committee education (29%)
• Streamline decision making via pre-approved asset allocations (24%)

“In an effort to boost returns, plans will have to accept more risk or different kinds of risk,” said Mike Jones, president and CEO of Pyramis. “We found that many institutions are increasing or diversifying their risk, changing the way they execute on investment decisions and some are completely rethinking long-held beliefs about asset allocation.”

Investors targeting excess returns, low correlations and different risk/return profiles
Among other key findings, institutions are seeking excess returns, assets with low correlations to public markets and assets with different risk and return profiles. As such, 7-in-10 pension managers believe picking the right market or region will be the primary source of future returns. Twenty-nine percent said they would definitely or likely increase the use of more aggressive “sub asset classes” (e.g. emerging markets equity and debt). Alternative investments are also becoming more popular, as 44% expect to change their investment mix to add illiquid alternatives (e.g. private equity) and 27% may add liquid alternatives (e.g. hedge funds).

More dynamic asset allocation and risk management demands derivatives
The survey also explored derivatives, which are required in implementing a more dynamic approach to asset allocation. Use of derivatives among U.S. plans has jumped since 2008 with 60% using them today (compared to 44% in mid-2008). Forty-eight percent report using derivatives to tactically adjust market (beta) exposure; 42% said they utilized them for “downside protection” or “tail risk.”

“Often, plans that implement derivatives and other strategies don’t have the resources to do it themselves,” said Derek Young, president of Fidelity’s Global Asset Allocation division and vice chairman of Pyramis. “That’s why it wasn’t surprising our survey found that in the past two years more than one-in-five institutions had expanded their relationship with outside managers and employed a so-called outsourced CIO.”

In future, traditional models, LDI to be joined by new models such as absolute return
Even as some institutions look to broaden outside partnerships, the Pyramis survey found they are questioning long-held beliefs in the asset allocation models themselves. More than one-third (35%) noted that with more highly correlated markets their approach in the past will not be effective in 10 years. When asked what they expect the traditional models to look like a decade from now, 33% said they will shift toward fixed income or immunized strategies (e.g. liability-driven investing or LDI), up from 19% in 2008, while 20% expect traditional asset mixes to prevail.

Among pension managers (mainly corporate pensions), LDI figured prominently. At the onset of the financial crisis in 2008, one-third of U.S. corporates said they were using LDI, compared to 45% today. At this point, virtually ever corporate pension surveyed had at least considered LDI.

Among those plans expecting entirely new asset allocation models to prevail in 10 years, more than one-in-four (26%) said they will shift significantly to both alternative asset classes or factor-based strategies (strategies where allocation is based on specific risks) and 9% believe they will shift significantly to absolute return strategies In total, more than one-in-three U.S. plans are considering some new model.

About the survey
Pyramis Global Advisors conducted a survey of institutional investors during June and July 2012, including 632 investors in 16 countries (193 U.S. corporate pension plans, 109 U.S. government pension plans, 92 Canadian pension plans, 149 European and 89 Asian institutions including pensions, insurance companies and financial institutions). Assets under management represented by respondents totaled more than $5 trillion USD. The surveys were executed in association with Asset International, Inc., in the U.S., the Canadian Institutional Investment Network in Canada, and the Financial Times in Europe and Asia. Institutional executives responded to an online questionnaire or telephone inquiry. A report on the survey is available at www.pyramis.com

About Pyramis Global Advisors
Pyramis Global Advisors, a Fidelity Investments company, delivers asset management products and services designed to meet the needs of institutional investors around the world. Pyramis is a multi-asset class manager with extensive experience managing investments for and serving the needs of some of the world’s largest corporate and public defined benefit and defined contribution plans, endowments and foundations, insurance companies, and financial institutions. The firm offers traditional long-only and alternative equity, as well as fixed income and real estate debt and REIT investment strategies. As of June 30, 2012, assets under management totaled more than $180 billion USD. Headquartered in Smithfield, RI, USA, Pyramis offices are located in Boston, Toronto, Montreal, London, and Hong Kong.

Fidelity Investments Institutional Services Company, Inc.,
100 Salem Street, Smithfield, RI 02917

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