Almost a third of asset owners are planning to increase
investment in new asset classes over the next five years in a
bid to meet their return objectives — and perhaps
increase their chances of long-term survival, according to a
The findings were published on Monday by State Street in a new report entitled "A
New Climate for Growth," which charts the strategic priorities
for the three investor groups for meeting their growth
objectives over the coming five years. The survey found that
while the more than 500 fund firms, insurers, and asset
allocators it surveyed expressed optimism about their ability
to meet their growth objectives over the next five years, this
optimism "may be misplaced," according to the
For starters, some 49 percent of respondents said they view
the economic outlook in their key markets as one of their
greatest opportunities over the next five years, while 34
percent said the equity markets are another major opportunity
over the same period.
"This suggests a dangerous assumption that future economic
performance alone will easily translate into prosperity for the
investment industry," the report’s authors wrote,
asserting that a combination of aging populations in developed
markets, lagging productivity growth, and continued low levels
of business investment means that what worked for investors in
the past may not work in the future.
Against that backdrop, the desire among asset owners and
fund managers to expand into new asset classes is not
suprising. Phil Edwards, global director of strategic research
at investment consultancy Mercer, notes that this is the
continuation of a longer-running theme, as institutional
investors are increasingly having a difficult time meeting
their return targets and are anxious to find higher-yielding investments.
"We have been saying for a while now that portfolios
dominated by equities, bonds and traditional asset classes are
likely to struggle," Edwards tells Institutional Investor.
"Investors will have to work a bit harder to generate the
returns that they need."
Edwards’ remarks come as asset owners seek to
lock in strong equity market gains in recent years. The MSCI
World Index — which represents large and mid-cap
equities in 23 countries — returned 29.26 percent over
the three-year period ending in May 2017.
"Investors have seen equity markets rise, fixed income looks
expensive, and UK property is uncertain because of Brexit,"
says Patrick Connolly, investment consultant at Chase de Vere.
"With cash paying next to nothing, it is no surprise to see
institutional investors focusing on capital protection."
While 30 percent of the 205 asset owners surveyed by State
Street said diversification into new asset classes is a
priority, 29 percent said fee reduction and 28 percent said
consolidating portfolio holdings are the most important tasks
facing them over the next five years. Connolly says the focus
on cost management is related to the continuing appetite to
protect capital gains.
The State Street pollsters also quizzed 200 fund management
groups about their strategic priorities for the same five-year
period. Some 34 percent said their top priority will be
entering new country markets. In Europe, fund management groups
have been doing this by setting up overseas branches, entering
partnerships with other fund groups, and engaging in mergers
In 2016, U.K. equities house Majedie Asset Management set up
a limited liability company in the U.S. to expand its
distribution reach. In March, London-based fixed income
specialist TwentyFour Asset Management confirmed a partnership
with U.S. group American Beacon to enhance its distribution
options in the U.S. market. The merger of Henderson Group with
Janus Capital, completed at the end of May, was billed as a
deal to enhance the "global footprint" of both firms.
The second-most important priority cited by fund managers:
the need to expand the products and services they offer over
the coming five years. Some 29 percent of firms said they
intended to do so.
Focusing on this area would be a savvy strategic move.
Mercer’s Edwards notes that, as asset owners seek
to explore new asset classes, it is only natural that fund
firms will want to ensure they have a product set that can
match this demand.