Other asset owners, while conceding that U.S. equity valuations appear high and sovereign bonds no longer offer significant yields, said they remain hesitant to make significant asset allocation changes in response to assumptions about big asset classes topping or bottoming out.
"Philosophically, I don't believe in making those kinds of predictions," said Michael G. Trotsky, executive director and CIO of the $80 billion Massachusetts Pension Reserves Investment Management Board, Boston. "We make gradual changes. If you're making big changes in any given year, you're being tactical" and just as likely to prove unlucky as lucky, he said.
Still, acknowledging that the flood of fiscal and monetary stimulus being deployed around the world now has chipped away at bonds' diversifying benefits, Mr. Trotsky said PRIM's investment committee is on the lookout for other diversifying assets and could take "another hard look at hedge funds" this year.
Aware Super, a Melbourne-based superannuation fund overseeing roughly A$140 billion in retirement assets, likewise hasn't shifted allocations significantly over the past year, said David Goodman, economist on the fund's investment strategy team.
Despite heightened economic uncertainties now, some things remain the same. "We still ... believe that equities underpin our portfolio and drive returns ... and we still fundamentally believe that fixed income provides diversity to our portfolio," even if its effectiveness as a hedge isn't as great as it used to be, Mr. Goodman said.
He noted that a year ago, in the depths of the pandemic sell-off, even holders of negative-yielding German sovereign bonds enjoyed diversification benefits as yields became more negative.
As of Jan. 31, Aware Super's largest offering — its balanced growth default option — had a 37.1% combined allocation to Australian and overseas equities and a 15.6% allocation to sovereign bonds, with alternatives, credit and cash accounting for the remainder.
As of June 30, 2019, the most recent fiscal year close before the coronavirus emerged, that option's allocations to equities and sovereign bonds stood at 37% and 20%, respectively.
Meanwhile, Richard L. Tomlinson, CIO of the Local Pension Partnership, a London-based manager of £19.9 billion ($27.9 billion) in retirement assets, said his team made changes on the margin to its portfolio exposures last year but no big strategic or tactical asset allocation changes.
During the worst months of the pandemic crisis, Mr. Tomlinson said he added modest allocations to equity and credit, having learned a painful lesson in 2008 not to take risk off the table at a time when the threat of systemic risk for global markets effectively guarantees that economic policymakers will do whatever it takes to right the ship.
LPP's nominal return target of 4% to 5% — 4 percentage points or so above short-term rates — effectively expelled high-quality fixed income from its portfolio "a long time ago," leaving it with an endowment-like portfolio that carries a lot of equity risk, he said.
For the coming year to 18 months, most investors expect a market environment that will continue to favor equity allocations, in anticipation of progress in vaccination programs that will end lockdowns around the world and ignite a rebound in global consumption.