GREENWICH, Conn. The number of U.S. institutional investors making allocations to portable alpha, absolute return and other non-traditional strategies is set to surge over the next few years, according to consultant Greenwich Associates.
Rodger Smith, a consultant with Greenwich, said in a telephone interview that interest in new strategies including 130/30, liability-driven investing and alternatives such as hedge funds has reached a tipping point, with recent incremental changes in asset allocations poised to accelerate.
Greenwichs latest annual survey of more than 1,050 U.S. institutional investors showed 2006 to be another year of incremental change for broadly defined asset classes: The weight of domestic stocks in portfolios fell 2 percentage points to 44.7% last year, while allocations to international stocks jumped 1.1 points to 15%. Allocations to equity real estate, private equity and hedge funds edged up 0.2 a piece to 4.1%, 3.8% and 2.1% respectively.
Behind those numbers, however, the survey showed a sharp pickup in demand for newer strategies that Greenwich analysts said could lead to a sea change in the operating environments of pension executives and money management firms alike in the coming five to 10 years.
Roughly one-third of institutional investors said they have already adopted non-traditional strategies in response to changing investment and regulatory environments, and another 30% expect to do so over the next two years.
While only 4% of respondents have immunized their liabilities, another 10% expect to do so in the next two years, noted William F. Wechsler, a vice president and consultant with Greenwich. Corporate pension plans continue to lead that trend, in response to regulatory changes that will move unfunded liabilities onto a companys balance sheet. The proportion of corporate pension plans immunizing their liabilities doubled to 6% in 2006 from 3% in 2005, according to the Greenwich survey.
A separate Greenwich survey of 224 corporate pension funds in the U.K., where mark-to-market regulations are already in place, could point to future trends for U.S. plans, the firms consultants say. That survey showed 38% of those U.K. plans reporting recent reductions in their exposure to equity and increases in their fixed-income holdings, with another 30% planning similar shifts. The comparable numbers for U.S. corporate pension plans are only 8% and 10% respectively.
Meanwhile, 21% of U.S. institutional investors reported having already implemented absolute-return strategies, with another 12% expecting to do so in the next two years.
Also, 11% of respondents had allocated money to portable alpha strategies by 2006, with another 13% planning to do so over the next two years.
Portable alpha is one of several areas in which public pension funds have been relatively aggressive, according to Greenwichs findings. The survey found 14% of public funds using that strategy in 2006, up from 10% in 2005. The proportion of corporate funds reporting allocations to portable alpha held steady for that two-year period at 8%.
Greenwich consultants tied the more proactive stance of public funds to their relative underfunding. Greenwichs survey showed the average funded ratio for public pension funds dropped to 86% from 89% in 2005.
On the fixed-income side, Greenwich found institutional allocations to domestic core-plus strategies falling sharply to 20.1% for 2006, from 35.7% in 2005, while allocations to international bonds surged to 16.3% from 3%. Mr. Smith said the two trends appear to be related, with investors expanding the scope for the high-alpha portions of their core-plus mandates to such an extent that many opted to switch to an international bond benchmark.
The survey showed 36% of institutional investors with hedge fund allocations in 2006, up from 32% in 2005. By category, U.S. endowments maintained a big lead, with 75% using hedge funds, compared with 24% of corporate funds and 23% of public funds.
More hedge funds
But the Greenwich survey showed more than 42% of public funds planning to make significant increases to their hedge fund allocations, while only 22% of institutional investors as a whole were predicting significant increases.
Mr. Smith said the pickup in institutional interest in non-traditional strategies has continued even though domestic U.S. equities, the biggest piece of a traditional asset allocation plan, have been enjoying strong returns for four years running. Even if that run continues for a while, however, its clearly getting near a top, he said.