Amid concerns over the global economy, institutional investment managers are optimistic about the long-term performance of equities and alternative investments, though they are expecting less from government bonds, according to a Tower Watson survey.
Near-term economic concerns are affecting the allocation strategies of institutional assets, the survey found. Just one-quarter of the managers, economists, strategists and analysts polled said they believe their clients will be more aggressive about their investments this year, down from the nearly half (44 percent) who said so last year.
More than one-third (34 percent) said their clients will invest more conservatively this year, up from the 29 percent who said so in 2014.
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Lower-than-average output in many economies around the globe will temper growth, said the respondents, who projected the U.S. employment rate to drop to 5.5 percent, about where it is. Much higher rates are expected in the Eurozone, with an average of double-digit unemployment in the near-term expected to improve to about 9 percent over a longer horizon.
Faith in the Eurozone is waning among fund managers; 71 percent called the situation there "fragile," up from 44 percent last year. Weakness in Asia and the U.S. is more "manageable," while the economies and policies of Australia, Canada and Switzerland were cited as being "more solid."
Managers projected the strongest performance in Japan, calling for a 9 percent return on that country's markets; 8.5 percent on Chinese equities; and 7.2 percent on U.S. equities.
U.S. GDP is expected to grow at 2.7 percent in 2015, with China growing at 6.7 percent, down slightly from 2014, while only 1 percent growth is projected in the Eurozone.
The yield on 10-year U.S. Treasuries is expected to rise to 3 percent in 2015.
That said, the preponderance of managers Towers surveyed are expecting little from developed-countries' bonds, as 83 percent felt "negatively" about the asset class.
What does it all mean for the management of retirement funds in the U.S.?
Perhaps the need for more active management, especially in a global environment where asset values are "heavily impacted by government actions," Towers Watson said.
But more than active management, the Towers report recommends portfolio diversity as the best response to uncertainty.
"While we agree that active managers can add significant value, especially in an environment where valuations are heavily impacted by government actions, we also believe that the appropriate response to an uncertain future is to emphasize portfolio diversity," said Matt Stroud, head of delegated portfolio management at Towers Watson.
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Nick Thornton
Nick Thornton is a financial writer covering retirement and health care issues for BenefitsPRO and ALM Media. He greatly enjoys learning from the vast minds in the legal, academic, advisory and money management communities when covering the retirement space. He's also written on international marketing trends, financial institution risk management, defense and energy issues, the restaurant industry in New York City, surfing, cigars, rum, travel, and fishing. When not writing, he's pushing into some land or water.
