Institutional investors' expectations for 2015 remain positive, if somewhat more cautious than in prior years, with elevated outlooks for tail risks and slightly lower expectations for U.S. stocks vs. 2014, said the fifth annual Commonfund Forum Investor Outlook Survey.
Overall, investors forecast a 5.8% return for the S&P 500 index this year, compared to last year's average forecast of 6.5%.
Over a three-year period, performance expectations matched last year with an average annual forecast for the S&P 500 of 6.3%. Thirteen percent of respondents expect three-year returns to average 3% or less.
When respondents were asked their overall expectations for annual performance of institutional portfolios over the next one, three, and five years, they reported lower expectations from the prior year in all cases.
Survey respondents said they expect their portfolios to return an average of 6.6% for one year, vs. an average 7.3% in 2014; 7.3% over three years, vs. 7.5%; and 7.3% over five years, vs. 7.7%.
Participants were also asked about tail risks over the next three years, which indicated elevated expectations. Nearly half — 49% — said that tail risks are increasing or somewhat increasing vs. 44% last year. Only 3% said they are decreasing vs. 11% last year; and 48% said they are staying the same vs. 45% last year.
The most significant tail risk reported over the next three years is a geopolitical crisis, and more specifically, turmoil in the Middle East.
Sixty-six percent of respondents cited geopolitical crisis as the most significant tail risk this year, up from 58% last year. The single biggest increase in risk this year is a European Union crisis, which jumped to 43% among respondents, compared to only 25% the prior year.
Sixty-one percent of respondents see risk associated with turmoil in the Middle East vs. 55% last year. The biggest decline among respondents was found in risk associated with emerging markets and China, which dropped to 33% this year from 46% last year.
Most investors expect the S&P 500 index to be the top relative performer again in 2015, although respondents see continued opportunity in emerging markets.
Although it continued to drop for a third consecutive year, emerging markets showed a moderate level of confidence among investors, with 50% of respondents expecting the MSCI Emerging Markets index to outperform the S&P 500 index over the next three years, compared with 58% last year.
High-yield bonds were the only area that saw an increase in expected outperformance vs. the S&P 500 index this year, with 15% of respondents believing the Merrill Lynch High Yield Bond index to lead the way with this year, compared to 8% last year.
The Commonfund Forum Investor Outlook Survey was anonymous and confidential and conducted March 2-13. Commonfund captured responses from executives at 208 foundations, endowments and pension funds. Aggregate assets of institutions responding totaled $273 billion.
