Institutional investors are focusing on their own specific plan needs and moving away from peer group comparisons as recent market volatility and political dynamics have caused pension funds to look in new directions for higher returns, according to a top J.P. Morgan Asset Management official.
John Garibaldi, managing director and head of J.P. Morgan's institutional advisory and sales group in New York, said behavioral changes over the past few years have caused institutional clients to want tailored, customized plans with money being allocated “in ways we haven't seen before.”
While no institutions are abandoning strategies of the past, incremental dollars are being funneled into areas such as emerging markets debt and equity, and private equity, he said.
“Institutions are really focused on managing three key themes … they feel they need to address right now,” said Mr. Garibaldi, highlighting the search for growth opportunities, the need to enhance income-generating aspects of the portfolio and the concern of inflation. “The majority of clients have all three on their radar. The key theme for us is the need to come up with broad-based solutions to address all three, and in a dynamic way.”
Another driving factor in client discussions has been the political environment, with a focus on Europe. Mr. Garibaldi said J.P. Morgan has a government relations team that constantly reaches out to clients who are trying to figure out how to position their investments for different political situations.
“There's no doubt the two are intertwined,” Mr. Garibaldi said of politics and institutional investment trends. Clients are asking “more so than ever” about real implications of politics at home and abroad, he said.
Mr. Garibaldi said discussions of finding growth to generate more than 6% returns have really focused on emerging markets. Net inflows to emerging markets fixed income totaled nearly $36 billion this year, through Aug. 25, and the J.P. Morgan Emerging Market Bond Index Global was up 7.7%, compared with a 3.1% downturn in the Standard & Poor's 500 during the same time period. Mr. Garibaldi said allocations to emerging markets fixed income is higher this year than the total of the past two or three years, and he expects it will still “pale in comparison” to numbers at the end of 2012.
Clients are not going back to the days of putting an investment structure in place and then leaving it alone, Mr. Garibaldi said. Changes in governance and implementation policies have quickened the decision-making process for investment officers and many institutions have created an “opportunistic bucket” to invest in unique areas such as high-yield bonds or private equity in Asia and Latin America.
“The places that might be less interesting to clients in moving money would be to low active risk, index-like strategies,” Mr. Garibaldi said. “People are looking to have their money work harder.” He added that institutions that have larger investment staffs and resources tend to be getting more active with aggressive management to outperform benchmarks and help with downside.
While both corporate and public pension funds are distancing themselves from creating portfolios based on what peer groups are doing, their approach is very different. Public funds need growth and can handle more volatility in their portfolios because of their long-term investments and less concern with liquidity compared with corporate plans, so they are looking at private equity in developed and emerging markets as well as emerging markets equity options, Mr. Garibaldi said. Another strong area is U.S. growth, where clients are looking for companies driven by innovation.
Corporate plans are more focused on income and duration management, Mr. Garibaldi said, because obtaining steady returns with traditional investment styles is no longer a viable option. He singled out as key areas for income generation high yield; mezzanine; high dividend, both U.S. and global; and REITs.
To combat future inflation, J.P Morgan's clients have shown a continued interest in real estate, commodities, bank loans with floating rate opportunities and infrastructure in developing and developed countries.
“When inflation hits, they're not expecting it,” Mr. Garibaldi said. “I think it is very much the focus of institutions” to plan for it.
It's not just the big funds that are dipping more into alternatives. Mr. Garibaldi said he met with three clients of very different sizes last month and all were actively discussing putting more emerging markets and private equity allocations into their portfolios. In the past, it was the largest funds with better resources moving first, but now smaller plans are putting more resources into alternatives and getting into niche strategies.
“People have to be very sensitive to the volatility of the market and needs they have to worry about, from growth to income to inflation,” Mr. Garibaldi said.