With tapering possibly concluding by the end of this year, and the first rate hikes possibly coming just six months after that, investors are understandably worried about how their portfolios will fare in a rising interest rate environment. According to a recent market survey conducted by eVestment and Casey Quirk, it’s one of the most consistent concerns among different types of institutional investors.
Focus on outcomes
While rising interest rates affect the entire investment landscape, and are on everyone’s minds, the relative mix of priorities still vary quite a bit.
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“Continually diverging approaches to asset allocation among different types of investors underscores the fact that asset owners and intermediaries increasingly allocate their portfolios among outcomes, not benchmarks,” says the survey.
Corporate pensions, for example, tend to be better funded than their public counterparts and tend to allocate fewer assets to alternatives. Defined-contribution plans may have very specific income targets that need to be met, even if that means missing out on long-term value opportunities.
Next generation fixed income
The eVestment survey suggests that rising interest rates will make it more challenging for asset managers to sell traditional fixed income products, and that managers will need to offer dynamic, multi-asset income portfolios that take incorporate global and emerging market strategies to meet their clients’ needs.
Accommodating liability-driven portfolios
“Conversations asset managers have with corporate pensions will differ dramatically than those they have with any other investor,” says the eVestment survey, because defined benefit plans will need to pursue de-risking and cash flow on a schedule that has little to do with macroeconomic trends. Even though corporate pensions have very distinct needs, they are by no means a niche client base and asset managers who are able to offer products specifically tailored to their near term objectives could have a windfall.
Better positioning for real assets
Increasing interest in real assets is one of the consequences of institutional investors’ drive to diversify risk and find non-correlated sources of income, but increasing search activity shows that the current crop of products (and real asset managers) aren’t meeting their needs.
“Different asset owners use such products as a means to different ends,” says the survey. “For example, corporate pensions use real assets for long-term yield, while non-profits seek alpha.” Learning to position real assets as more than just an illiquid yield-bearing asset is key for marketing products to a broader group of large investors.
Institutional Investors finding global opportunities
Institutional investors are realizing that domestic market biases are holding back their returns, and asset managers have to follow suit. For some asset managers that means expanding their search for investment opportunities beyond local markets; for those with a geographic mandate it might mean looking for new clients abroad.