GREENWICH, Conn. - Institutional investors are coping with the recent changes in interest rates in contradictory and unpredictable ways, according to a recent survey.
The survey of institutional investors by the consultant Greenwich Associates found investors are putting more assets into money markets and less in long bonds, but surprisingly, they are not changing the average duration of their fixed-income portfolios.
Greenwich's report found there virtually no change in the average modified duration of portfolios or in the investors' anticipated modified duration for the next year, despite the dramatic rebound on interest rates seen this year.
The average modified duration among portfolios has remained unchanged from last year at 4.2 years; investors surveyed said the expected modifed duration for next year also will be 4.2 years. Pension fund portfolios remained at durations of 5.7 years in 1993 and 1994, and are expected to stay at that number next year. Investment managers cited their durations had increased to 4.8 years from 4.5 years and will increase to 4.9 years next year. Mutual funds dropped their durations to 4.5 years from five years and will increase only to 4.6 next year.
The investors interviewed either want to make shorter, more aggressive investments, or to lengthen their portfolios and stay fully invested in the market. The different reactions can be traced to differing views on the outlook for interest rates, according to the study.
"The differences of opinion demonstrate that in contrast to the situation in many recent years, when the secular trend of inflation appeared to be firmly down, there is now no consensus on the trend," according to the Greenwich report.
While the duration numbers were a startling finding, other data were more predictable, including a drop in the use of long-duration bonds and an increase in the use of short-term money market instruments.
The research found a drop in the institutions using Treasury bonds to 53% of investors polled in 1994 from 67% in 1993. Institutions holding 30-year agency mortgage-backed securities also dropped to 64% in 1994 from 73% of respondents in 1993.
On the other hand, holdings of money market instruments are up 16%, with the dollar value of assets increasing to $852 billion from $773 billion last year. Money market mutual funds and investment managers accounted for the largest share, 28% and 23% respectively; pension funds were fourth, making up 8% of the market. Only 44% of those investments were in maturities of more than 30 days.
Not surprisingly, according to the Greenwich analysts, demand for derivatives among certain sectors is down. The number of corporations using futures and exchange-traded options dropped to 38% in 1994 from 42% in 1993 and the number of pension funds using them dropped to 13% from 16%. However, overall demand increased to 25% from 22% .
Among over-the-counter derivatives, total use of all types of instruments dropped, most notably structured investments, which showed an 11% drop in the number of investors using them.
"In the structured area ... the complexity of the products and their negative results for some users combine to put them, for the time being, on most institutions' back burner," according to the report. On the other hand, the Greenwich analysts note the uncertain interest rate and inflation climate favors the use of futures as a cheap and liquid hedge.
"Given these considerations and current market conditions, our consultants say, the shifts in derivatives revealed by the research are not surprising. What is surprising is that the shifts are not larger and that there are not even more of them," according to the report. The report notes 14% of fixed-income investors said they expect to start using some type of interest rate derivatives next year, so demand for them will continue.
The report - Surprising Results of Changing Rate Climate - was based on Greenwich's 19th annual study of North American institutional fixed-income investors, including pension funds, banks, insurance companies, investment managers and mutual fund managers. Greenwich consultants interviewed 1,779 investors at 916 U.S. and 171 Canadian institutions in March and April.