Poor return prospects are pushing more official institutions into the arms of strategic partnerships with money managers running multiasset mandates.
In July, the Beijing-based National Council for Social Security Fund announced the appointment of J.P. Morgan Asset Management, Neuberger Berman Group LLC, Lombard Odier Investment Managers and Schroders PLC to manage such multiasset portfolios. Officials at the $136 billion fund did not say how much each firm got.
Many other official institutions — which comprise central banks, sovereign wealth funds, sovereign pension funds and similar government-controlled investment organizations — are considering adding multiasset strategies, including the $32 billion State Oil Fund of Azerbaijan, Baku, sources said.
While managers declined to talk about specific clients, they said in general, the trend is accelerated by low nominal yields and sovereign credit concerns combined with higher overall volatility in global markets. As a result, competition is rising sharply among those providing multiasset portfolios with a strategic partnership element for sovereign wealth funds and other official institutions.
“In many ways, official institutions are pushing the envelope to bring about the next generation of money management,” said Robert Prince, co-chief investment officer at Bridgewater Associates LP, Westport, Conn.
Interest rates that are straddling a subzero yield environment in some developed economies have hurt official institutions disproportionately because of the institutions' typically high reliance on investments in debt issued by the U.S., eurozone, Japan and U.K. governments, sources said. Official institutions, with an aggregate $24 trillion in assets, have witnessed a steep decline in annualized returns from their government bond holdings in particular, sources said.
From 1998 to 2008, a typical portfolio of high-quality government bonds with an average duration of two to three years returned about 3.5% on an annualized basis in Special Drawing Rights terms, according to estimates by BlackRock Inc. The same portfolio now would generate an annualized return of less than 0.5%. The impact is estimated to have cost central bank reserve managers alone about $300 billion a year compared to pre-crisis levels, according to BlackRock.