NEW YORK — The sharp decline in global markets earlier this month will likely have a significant impact on institutional investors' collective mindsets and long-term approaches to protecting their liabilities.
"Volatility is back," said Michael Peskin, managing director in Morgan Stanley's Global Pension Group, New York. "We have had a couple of years of low volatility, but the riskiness of the market is asserting itself again."
Shortly after the U.S. markets reached their highest levels in six years earlier this month, major sell-offs prompted a roughly two-week decline in both domestic and global markets.
But U.S. institutional investors appear to remain unfazed by the downturn.
"They're not panicking," said Ken Froot, a Harvard University professor of business administration, and co-creator of State Street Global Markets' Institutional Investor Confidence Index. "The periphera is not nearly as scared as the center (meaning short-term investors)."
The Standard & Poor's 500 stock index, for instance, declined 5.6% over an 11-day span beginning May 8. In that same period, the Morgan Stanley Capital International Emerging Markets index declined roughly 14% after hitting its all-time high and the broader MSCI EAFE Index dropped 8.2% between May 8 and May 22.
Commodities fluctuated wildly as well. Gold, which reached a 26-year high of $732 an ounce on May 12, declining roughly 7.6% the following week, its largest weekly decline in 16 years.
"It's really just a return to more normal levels of volatility," said David Hammerstein, chief strategist at investment consulting firm Yanni Partners Inc., Pittsburgh. "The downturn shouldn't be a catalyst to completely change your investment policy, but it could confirm investors' needs to be diverse and to stabilize their liabilities."
Ultimately, the downturn could serve as a wake-up call for pension plans to begin shifting to more of an asset-to-liability-based approach to investing, said Mr. Peskin.
"There has been a great deal of talk about such approaches, but by and large there's been a lot less actual movement," said Mr. Peskin. "It's moving at a measured pace, but this could be an event that leads pension plans toward adopting a more risk-management-based approach."