Institutional investors remain bullish but have lowered their stock market returns expectations, according to a new study from Commonfund.
Returns expectations 6.25% over next three years
The study asked institutional investors for their returns expectations and concerns in 2014 and over the next three years. After a strong 32 percent return in the S&P 500 (INDEXSP:.INX) Index last year, investor expectations going forward are more towards the mean. In 2014, investors generally expect the index to rise near 6.5 percent. Average annual return expectations over the next three years for the S&P 500 Index are 6.25 percent, down from last year’s survey results of 7.1 percent, according to the report.
The survey of 200 investors, representing a 35 percent response rate, represented the thoughts of institutions representing a total of $163 billion under management. The group also had modest expectations for the yield on 10-year U.S. Treasury notes. A year ago at this time, the yield on the 10-year Treasury note was 1.9 percent versus 2.8 percent as of early March 2014.
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Rates expected to rise modestly
Survey respondents forecast a slight increase in rates, with the average expectation at 3.0 percent. Approximately 19 percent expect little change or a slight decline in yields for the remainder of 2014, the report said, while slightly more than one-third of respondents expect yields to rise to the range of 3.25- 3.50 percent.
Emerging markets expectations
Far fewer respondents expect emerging market equities to outperform U.S. equities compared to last year (58 percent versus 78 percent), the report said. “Another significant change from last year are investor expectations with regard to developed markets outside of the U.S. with 42 percent of respondents expecting Europe and Japan to outperform the S&P 500 index versus just 23 percent last year.”
Respondents in general expect tail risk to be slightly elevated over the next three years. 44 percent of respondents forecast such risks as increasing versus 38 percent last year.
Most concern was for a geopolitical crisis or Mideast turmoil, followed by issues in China. Then the debt crisis emerges, as Washington’s gridlock on debt is in at 37%, down from 62% in the previous year. A rapid rise in interest rates follows closely at 36% with concerns for an EU crisis trailing at 25%, down from 55%.
Fund usage and compensation
The study showed a trend toward direct manager engagement, with just over 20% saying they planned on increasing use of private capital fund of funds. However nearly half the respondents say they plan on “staying the same” with their fund of funds usage. The report also illustrated how fees paid by investors can be very different, punctuating the point that some investors are negotiating lower fees while others have not effectively done so.