Money managers and consultants are split on whether institutional investors are taking enough risk in their portfolios, amid a backdrop of continued support for risk assets, dissipating geopolitical concerns and a synchronized and improving growth story around the globe.
The overarching conclusion: Investors need to be smarter when it comes to how they take investment risk.
Bank of America Merrill Lynch's July Global Fund Manager Survey, with participation from firms with $586 billion in assets, found the average cash balance was 4.9%, down slightly from 5% in June but still above the 10-year average of 4.5%. A bearish view on markets was cited by 25% of respondents for their overweight cash position.
"We know many investors have been nervous around taking risk," said Richard Turnill, global chief investment strategist at BlackRock Inc., speaking at a July media briefing in London.
He acknowledged fears that volatility could be about to rise but said the firm's analysis suggested it could remain lower for longer. "A real challenge could be many investors are not taking enough risk in their portfolios," he said.
Northern Trust Corp.'s Wayne Bowers, London-based executive vice president and CEO of asset management for Europe, Middle East and Africa and Asia-Pacific, said executives there "have informed clients they should be taking risk" in portfolios. While that may be a challenge for certain types of investors such as more mature defined benefit funds, he does "get the sense that clients have been worried a lot about the political environment, and that has reduced their risk appetite, which means that they don't have enough risk in their portfolios," he said.
David Riley, head of credit strategy at BlueBay Asset Management LLP in London, said a good environment exists for risk assets. While it likely to remain so for some time, it is important to distinguish between the short and long term.
"Investors should be invested and they should be taking risk in the current environment — risk assets offer a good risk/reward profile," Mr. Riley said. "In as much as you have a lever that you can move to adjust your portfolio at relatively low cost within a broader, longer-term framework, you should be pushing that toward adding and increasing risks, in terms of return, into your portfolio."
He acknowledged some pension funds are constrained, so are looking for predictable cash flows and income, considering how to do that without necessarily increasing the public equity component.