Defined benefit investors are stepping back from emerging markets bonds and equities in favor of global equities, low-variance equities, infrastructure, real estate, alternative credit and traditional passive strategies, said a report from Principal Global Investors and CREATE-Research.
Reviewing data from their 2013 through 2015 investor surveys, Principal and CREATE-Research found the percentage of defined benefit investors that indicated they would use global equity funds in their asset allocation in the next three years rose to 69% in 2015 from 56% in 2013; infrastructure to 65% from 45%; traditional passive funds to 70% from 53%; real estate to 68% from 55%; low-variance equities to 62% from 52%; and alternative credit to 56% from 46%.
On the flip side, the percentage of DB investors that indicated they would use emerging markets government bonds declined to 33% from 46%; emerging market hard currency bonds to 38% from 46%; emerging market equities to 45% from 52%; and emerging market local currency bonds to 18% from 25%.
“The step back in exposure to emerging markets shows that the inexorable glidepath to economic dynamism that long dominated the emerging markets' narrative is being rewritten. In the 1990s, investors underestimated the weaknesses of emerging economies. In the 2000s, they overestimated their strengths,” the report said. Political turmoil and the Federal Reserve's tapering announcements, among other factors, have been headwinds for the asset class, the report said.
Reviewing data from their defined contribution respondents, the report found growing interest over the past two years in diversified income funds (up to 63% from 50%), target-date funds (60% from 58%), target-income (58% from 47%), target-risk retirement funds (44% from 37%), diversified growth funds (52% from 45%) and passive equity/bonds funds (66% from 59%), while interest in actively managed equity and bond funds declined to 47% from 51%.
For target-date funds, one tailwind has been the Pension Protection Act of 2006, which designated them as one of the qualified default investment alternatives, the report said.
On the decline in actively managed equity and bond funds, the report said: “In the face of aging demographics, ever more members are migrating from traditional single-strategy active bond/equity funds to diversified income funds. Thus, legacy funds are being rechanneled as investors approach retirement” and “new (DC) inflows are increasingly channeled into lifecycle funds, which are now widely accepted as advice-embedded vehicles.”
The report further found that uneven global growth, rising global debt and a looming interest rate hike are driving both DB and DC investors to multiasset-class funds.