Greenwich: How US institutions are recalibrating strategies

The main conclusions of a new report by Greenwich Associates on how US institutions have responded to the global downturn are hardly surprising - that big US institutions used the the first half of 2009 to re-examine their investment policies, asset allocations and investment managers to determine what went wrong last year; pinpoint the policies, investments and managers that performed as expected through the market crisis; and to identify those that fell short.

Nevertheless the report, based on what seems to be a fairly exhaustive survey of 152 US institutions, identifies some trends worth noting for the year ahead.

The lessons that these institutions drew from their internal reviews will have a “profound impact, not just on the US investment management industry, but also on the world’s financial markets and on the millions of American workers who rely on the nation’s pension system for their security in retirement”, predicts Greenwich.

Of the 162 respondents, 97 were corporate pension funds, 34 public funds, and 21 endowments and foundations with at least $1bn of assets under management.

The key findings of the survey:

• Institutions are sticking with diversification strategies: they continued to reduce allocations to US equities through the second half of 2008 and into the first six months of 2009, and remain committed to significant allocations of hedge funds, private equity and other alternative investments.

• At the same time, corporate plan sponsors hit last year by plunging portfolio asset values are moving to reduce the volatility of pension fund investment performance by increasing allocations to fixed income, even as they shut defined benefit plans to new employees and reduce matching contributions to defined contribution plans.

• The financial crisis has had an equally profound effect on public pension funds. As public funds are not subject to the same accounting rules that govern corporate pensions, they are accepting greater levels of short-term volatility and lower levels of liquidity in return for the chance to make up for last year’s setbacks with strong investment returns. As such, fewer public funds are shifting assets into fixed income and more are increasing allocations to alternative asset classes with higher potential for returns.

• After finding themselves forced to sell assets into a falling market in order to fund operations and other needs during the crisis, endowments and foundations are revising their views on cash holdings and increasing liquidity requirements within their portfolios. But there are no indications they are reconsidering investment policies that now emphasise diversification and incorporate relatively high allocations to hedge funds, private equity and other alternative asset classes. In fact, 44 per cent of endowments and foundations have actually increased their allocations to hedge funds over the past 12 months.

• Public pension funds and endowments have been the first movers among US institutions to make opportunistic investments related to the market crisis. Almost a quarter of US institutions overall have already made investments in opportunistic funds, including vehicles looking to exploit rare opportunities in fixed income, secondary private equity and other asset classes. Endowments and foundations have led the way, with 45 per cent of them investing in opportunistic funds, followed by public pension funds at roughly one-third.

• More than 20 per cent of US institutions have shifted assets from active managers to passive strategies in the past year, but it is not yet clear whether this move represents a temporary “parking” of assets as institutions abandon underperforming active strategies and managers, or a more secular change in approach.

• Almost half of US institutions have scaled back their securities lending programmes after discovering unexpected levels of risk during the market dislocations of last year.

• Manager turnover could reach historic highs over the course of the next 12 months if institutions follow through on their plans for managing hiring and firing. At the very least, managers can expect tough new demands for increased transparency and disclosure.