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U.S. Pensions Pulling Back on Alts as Rest of World Piles In: Survey

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Confidence among institutional investors worldwide has revived, but significant regional differences exist across several issues, according to a survey released Monday by Pyramis Global Advisors, a Fidelity Investments company.

In particular, the survey found that U.S. institutions appeared to be pulling back from use of liquid and illiquid alternatives, even as their use was rapidly rising in the rest of the world.

Ninety-one percent of pension plans and other institutional investors said they could achieve target returns in five years, up from 65% reported in 2012.

“A recent spike in market volatility comes after years of strong equity returns and below-average volatility, Pyramis’s chief investment officer, Pam Holding, said in a statement.

“Our global survey suggests that while institutional investors have divergent views on volatility, most want to keep their winning streak going by continuing to grow their portfolios and improve funded status.”

Pyramis, a Fidelity Investments company, conducted the survey this summer among 811 respondents in 22 North American, European and Asia/Pacific countries, representing some $9 trillion in assets.


Only 22% of U.S. respondents planned an allocation increase to illiquid alternatives over the next one to two years, compared with 79% in Asia/Pacific and 57% in Europe.

Thirty-one percent of U.S. institutions said that among investment approaches most likely to underperform over the long term, hedge funds were least likely to meet their expectations.

And only 19% of U.S. plans in the survey said hedge funds and private equity investments were worth the fees, compared with 91% of Asia/Pacific investors and 72% in Europe that felt they were worth the fees.

“U.S. plans are currently re-evaluating the complexity, risks and fees associated with hedge funds,” Pyramis vice chairman Derek Young said.

“Our survey suggests that U.S. institutions are preparing to move back to a more traditional, back-to-basics portfolio.”

Market Volatility

The survey found that outside North America, 91% of Asia/Pacific investors and 79% of Europeans expected a decrease in the frequency of boom/bust cycles.

In contrast, only 7% of U.S. institutions expected volatility to decrease, while 42% expected an increase.

A similar trend appeared in Canada, with 10% of plans expecting a decrease in volatility and 60% foreseeing an increase.

Market volatility continued as a top concern in Europe and Asia/Pacific, the research found, while in the U.S., respondents expressed less worry about capital markets than in years past.

The top concern for U.S. plans was current funded status, with a majority of pensions intending to improve it.

European investors also remained concerned about a low-return environment, while those in Asia/Pacific were focused on regulatory and accounting changes and Canadians on risk management.

Investment Objectives and Opportunities

Global institutions’ primary investment objectives, on average, lean toward growth, but again with geographical variations, according to the study.

Sixty-four percent of Asia/Pacific institutions listed capital growth as their primary objective.

For U.S. plans, funded status growth was the chief investment objective for 62% of public plans and 37% of corporates.

European plans were mainly focused on preservation, while their Canadian counterparts were equally intent on preserving and growing their funded status.

The survey found that 71% of Asia/Pacific plans were seeking medium-term investment opportunities in emerging Asia, while 34% of North American plans favored North America and 32% emerging Asia.

In Europe, 33% of plans were looking for medium-term gains in North America, 21% in emerging Asia and 19% in developed Europe.

— Check out Alternative Bond Funds: What Advisors Need to Know on ThinkAdvisor.