The U.S. Federal Reserve's decision to taper its asset purchase program has left institutional investors “jittery,” according to a new bfinance survey.
In November, the London-based data provider surveyed European and North American pension funds, insurance companies, family offices and other institutional asset owners and allocators representing combined assets under management of US$275 billion.
While 2013 saw the best market performance since the 2007 meltdown, the survey found that “major asset owners seem torn between the general forecast of a moderate global economic recovery in 2014—which advocates a continued ‘risk-on’ bias in portfolio allocations—and the necessity to protect the assets from the possible adverse impact of Federal Reserve tapering.”
The survey also found institutional investors continue to view asset-price volatility as the major source of risk for the year ahead, ahead of currency volatility and of a liquidity/credit crunch.
On the bright side, the number of investors who said they have action plans in place to protect themselves from the adverse effects of tapering has doubled to 40% since last year.
Investors polled also said the next six months to three years would see continuing diversification to emerging market debt and real assets such as property and other alternatives, in particular, infrastructure. On the other hand, interest in credit is fading, at least over the short term, while investor intentions towards sovereign bonds over a three-year horizon indicate a pick-up.
Investor confidence in smart indices and absolute return strategies like diversified growth/risk parity to manage asset price volatility is confirmed, said bfinance, by the 59% of investors planning to allocate to alternative indices this year versus 47% currently.
More than 50% of respondents do not anticipate a rate increase before 2015 (if at all) and 75% of respondents intend to take advantage of the bond market volatility that is expected to come with tapering.
Said Emmanuel Lechere, head of the market intelligence group at bfinance, in a statement: “If, during the financial crisis, portfolio diversification had lost much of its ability to mitigate risks, the continued reduction in traditional asset class correlations observed over the last two years gives new impetus to this investment approach today.”