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 new report.
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 report’s authors.
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 and acquisitions.
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.