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Investors concerns over financial repression
17 June 2013
Over 66% of investors want asset managers to prioritise a deeper understanding of the debt crisis and its hidden risks and opportunities, says CREATE-Research
Principal Global Investors
The primary factor driving global markets in the next three years will be central bank policy decisions, according to 62% of those surveyed in Investing In A Debt-Fuelled World, a report published by CREATE-Research and commissioned by Principal Global Investors.
The report highlighted worry about financial repression – caused when interest rates are kept low for a long duration – which will distort asset allocation decisions and also analysed the challenges facing global financial markets imbued with ultra-low interest rates, heavy uncertainty and investors who lack direction.
“Politics, more than economics, will drive the markets. Rather than try and beat the markets, investors will target specific solutions that will meet their unique needs. Alpha will be in the eye of the beholder. Asset managers will need to manage expectations of what can be delivered: 61% of survey respondents want asset managers to avoid unrealistic claims about returns and 55% agree that expectations could be managed more effectively,” commented Professor Amin Rajan, CEO of CREATE-Research and the report author.
Nick Lyster, CEO of Principal Global Investors Europe, added that over the next decade, the fall-out from repeated rounds of unprecedented quantitative easing and the resulting financial repression will continue to decrease the number of defined benefit (DB) pension plans and drive the evolution of defined contribution products.
“Baby boomers most of whom have never seen a DB arrangement will own close to 75% of retail assets in the next five years. These investors will be forced to shoulder their own retirement risk. Against this backdrop, this year’s report identifies a new lens for asset managers through which to view investment strategy returns,” he added.
Lyster believed that the asset management industry will need to redefine how it works and new, forward-looking products need to be developed. “Innovations will be more solutions-based, with alpha being a question of exceeding clients’ needs rather than the market,” he added.
Key findings from the report include that over two-thirds of investors wanted asset managers to prioritise a deeper understanding of the debt crisis and its hidden risks and opportunities, while 49% of those interviewed said they would prefer an integrated solution for asset allocation, manager selection and investment options.
There was a parallel shift into defined contributions (DC) plans that combine the best of today’s plans with new innovations in response to personalisation of risk. Today, DC plans hold 43% of global pension assets and by the end of the decade, this share will exceed 60%. The transition has already prompted asset allocation strategies to evolve.
Survey respondents identified a shift to real assets — the biggest single change from this annual study’s 2012 edition. Over the next three years, 45% of survey participants believe DC investors will pursue a dynamic asset allocation strategy. 62% of DC investors reveal they would choose to pursue balanced/multi-asset class funds. DC plan members will increasingly distinguish between beating the market and meeting their needs, defined as the most enduring legacy of the 2008 crash. DB members will continue to move away from diversification strategies that target returns and move toward outcome-oriented investing.