Institutional investors are turning to riskier assets to improve performance in the persistent low-yield environment, but they are doing so without dramatically increasing the risk level of their overall portfolios.
Investors have added risk - or rerisked - within asset classes, in a variety of ways including by moving to emerging markets equities from U.S. equities, or by moving to corporate bonds from governments. But these moves have raised risk only marginally because allocations have been relatively small.
These intra-asset-class moves don't “affect the volatility of the overall portfolio much at all,” said Phil Page, London-based client manager at Cardano Risk Management BV. “The big drivers (of pension fund risk) are still the exposure to equity markets and the fact that pension funds don't have much liability hedging as a whole,” Mr. Page said.
Meanwhile, the trend toward reducing risk - or derisking — is much more widespread and has a greater impact on total portfolio risk. Derisking is accomplished by selling equities and buying other growth assets (such as high-yield or emerging markets bonds) or by implementing a liability-driven investment program.
The diversification gained by adding asset classes, along with newer strategies such as low-volatility equity or dynamically managed multiasset strategies that boost risk management, have further dampened overall volatility in investors' portfolios.
“You're seeing rerisking within asset classes ... but all of that is against a backdrop of a wave of risk reduction,” said Timothy F. McCusker, partner and director of traditional research at NEPC LLC, Cambridge, Mass. “There are competing forces there.”