Pyramis: Tactical, opportunistic approaches gaining favor

A growing number of institutional investors worldwide are adopting more tactical or opportunistic approaches to asset allocation as they struggle to cope with a low return market environment, according to a Pyramis Global Advisors survey.

The survey — the 10th in an annual series by Pyramis — showed 41% of the 632 institutional investors from 16 countries who participated indicated that they've become “more tactical” in their asset allocation over the past three years, while 48% are reviewing risk measures more frequently.

For the 193 U.S. corporate plans surveyed, with combined assets of $550 billion, the percentage describing their asset allocation approach as purely “strategic” dropped to 58% from 81% a decade before, while the percentage pursuing a combined strategic and tactical approach jumped to 40% from 3% over thE period.

The results were similar for the 109 U.S. public plans — with combined assets of $1.3 trillion — with those under the “strategic” banner dropping to 47% from 81% 10 years ago, while the strategic-tactical camp jumped to 50% from 8%.

In an interview, Mike Jones, president and CEO of Pyramis, said the latest survey results suggest something of a “watershed” moment in asset allocation.

The “full volume” of changes in asset allocation approaches being considered now – with signs of much stronger demand for illiquid alternatives, including real estate and private equity, liquid alternatives such as hedge funds and subasset classes like emerging markets equity and debt – suggest institutional investors are poised to take on more risk or different risks to achieve the results they need, Mr. Jones noted.

If the survey points to a growing willingness to rethink asset allocation, the question now is “how are they going to do it?” asked Mr. Jones.

The survey showed almost 80% of all respondents saying that picking the right markets or regions to overweight will be their “primary source of future returns.” Likewise, 64% are using derivatives as a key component of a more dynamic approach to asset allocation, with 43% using derivatives to tactically adjust market – or beta – exposure.

In other results, 32% predicted that asset allocation based on specific factor-based risks, such as inflation, with significant shifts to alternative asset classes, will be the organizing principal for asset allocation over the next 10 years.

A more tactical asset allocation environment could result in starker outcomes with a wider spread between winners and losers, Mr. Jones conceded.

At the same time, he argued that for large asset management firms with the resources needed to partner with institutional investors looking for broad-based “solutions” to their funding needs, the survey's results point to growing opportunities. He said Pyramis, in conjunction with the broader capabilities of parent Fidelity Investments, is well equipped to be a fierce competitor in that coming market.

The June and July survey by Pyramis, titled “Shortening the Time Horizon,” covered investors overseeing combined assets of more than $5 trillion.