Institutional investors worldwide to rework bond portfolios in 2014 — Casey Quirk, eVestment

Institutional investors globally will look to restructure their fixed-income portfolios this year in response to rising interest rates, according to an annual forecast survey from Casey, Quirk & Associates and eVestment.

All institutional investors, including investment consultants, said rising interest rates were the biggest concern for the year, and 48% expect to restructure their fixed-income portfolio, particularly corporate pension funds adopting liability-driven investing.

“One fascinating thing is the continued focus on fixed income,” said Benjamin Olmstead, vice president of new product innovation at eVestment. “Even as equity markets are at all-time highs, I still see most clients, consultants and plans focused on fixed income … and a lot of new strategies.”

There is also continued “anti-home-court bias” among institutional investors, Mr. Olmstead said. More money is expected to flow into global equity and bond strategies than to domestic allocations, as institutional investors can still get exposure to domestic markets through the global allocations.

“With global debt, there is growth virtually across the board, whether its public, private or sovereign wealth funds,” Mr. Olmstead said. In 2012, global bond strategies saw $163 billion in new flows and $108 billion in outflows. Last year, inflows were $139 billion compared to $81 billion in outflows.

Consultants expect real assets to represent 14% of new search activity this year, up from 6% last year, and to be the highest percentage of all strategies this year. Most types of investors are looking to increase real assets as a way to obtain non-correlated returns, Mr. Olmstead said. On the other hand, replacement searches are increasing for more traditional asset classes. Replacements for managers in domestic equity, EAFE equity and domestic equity will make up 58% of expected search activity, up from 45% last year.

The survey, which in previous years was only for consultants, was modified this year to include 135 institutional investors with $1.6 trillion in assets under management, in addition to 65 consultants with $3.7 trillion in assets under advisement. Sixty-four percent of the respondents were from the U.S.