Global Investment Manager Survey on Cross-Asset Correlation August 2013
TABLE OF CONTENTS Cross-Asset correlation emerges a key risk factor... 3 Detailed survey findings... 4 Survey Universe... 14 2
Cross-Asset correlation emerges a key risk factor The CRISIL Global Research & Analytics (GR&A) Global Investment Manager Survey 2013 on cross-asset correlation highlights several important trends and investor views. These include: Lack of consensus among investment managers on the future of cross-asset correlation: 30% of respondents expect cross-asset correlation to stay high and 42% expect a breakdown only after 2 years Investment managers consider correlation among key risk factors: 88% place it among the top 5 investment risk factors to manage Converging cross-asset correlation has impacted fund performance negatively: 88% of respondents admit at least a partial impact. However, they believe correlation has had a negligible impact on fund flows so far Investment managers have started responding to converging cross-asset correlation with changes in asset allocation methodology and choice of assets: Some investment managers have also turned more passive Alpha-generating opportunities have declined with converging cross-asset correlation: 65% of respondents believe that rising correlation has led to at least a partial decline in alpha opportunities Investment in high-end research considered key to manage cross-asset correlation: 50% of respondents view investment in high-end research capabilities critical to manage correlation Investment managers constantly on the lookout for newer, non-correlated assets: 69% of respondents feel the best solution to manage correlation risk is identifying and investing in newer, non-correlated assets Interest already brewing to invest in correlation as an asset class: 29% of respondents have shown an inclination to invest in correlation as an asset class in itself if such an investment avenue becomes available 3
Detailed survey findings 1. Outlook on the trend of converging cross-asset correlation 24% 24% 18% 18% 12% 6% Will remain at current heightened levels Will remain high, above historical levels but lower than current levels Already feel it is breaking down Will break down in 1 year Will break down in 2-3 years Will break down in 3-5 years A mixed response 30% of participants believe correlation would stay at a heightened level, while 70% believe it would break down. However, there is no consensus on the expected time frame for the breakdown 4
2. Relative importance of correlation as a risk factor Topmost 0% Top 3 factors 47% Top 5 factors 41% Less than top 5 0% Not significant 12% 88% of respondents place correlation among the top 5 risk factors, and 47% place it among the top 3 factors. Interestingly, none view it as the topmost risk factor 5
3. Impact of correlation on fund performance Significant negative impact 12% Partial negative impact 76% No impact 12% Not sure 0% 88% of investment managers believe correlation has impacted their fund performance negatively. 12 % of respondents have highlighted a significant negative impact 6
4. Impact of correlation on fund flows Significant negative impact 25% No impact 6% Insignificant impact 63% Significant positive impact 6% 25% of respondents have indicated that increased correlation has led to fund outflows, while the vast majority have not indicated any significant impact on flows due to converging cross-asset correlation 7
5. Investor response to converging cross-asset correlation 41% 18% 18% 12% 12% Change in asset allocation methodology Change in choice of assets More active management of assets More passive management of assets No significant change 18% of investment managers have looked to change their asset allocation methods in response to converging correlation, while another 18% have changed their choice of assets. 41% have turned more active, while 12% more passive 8
6. Latest investment in alternative assets Volatility-based instruments, 27% Total Return Equities Fund None, 20% Other, 33% Inflation linked RE Investments Managed Futures TIPS, 20% Commodity Long Short Volatility-based instruments have emerged as a popular investment option among alternatives, with 27% of respondents making a recent investment in them. Inflation-based instruments are next in line, with 24% respondents indicating a recent investment. 20% of respondents have made no investment in alternatives 9
7. Decline in alpha-generating opportunities due to rising correlation Significant decline 6% Partial decline 59% No impact 35% Not sure 0% 65% of respondents believe that rising correlation has led to reduced alpha-generation opportunities, at least partially 10
8. Importance of research in managing cross-asset correlation Topmost 12% Top 3 factors 18% Top 5 factors 35% Less than top 5 18% Not significant 18%. 65% of investment managers believe research is among the top five factors to manage correlation. 12% view it as the most important factor to manage converging correlation 11
9. Most effective tool to manage converging cross-asset correlation Exploring newer non-correlated asset classes 38% Investing in highend research and technology 19% Both of these 31% Others 13% 69% of respondents believe that exploring newer, non-correlated assets would be the key to managing correlation, going forward 12
10. Interest to invest in correlation as an asset class No 71% Maybe 29% Yes 0% 71% of respondents have indicated that they are not looking to invest in correlation as an asset class currently, while 29% have indicated that they are open to the idea 13
Survey Universe The CRISIL GR&A Global Investment Manager Survey 2013 was administered to investment managers across the globe between 22 April and 20 May 2013. A total of 30 fund managers representing fund houses managing over USD600 billion of assets under management responded to the survey. The respondent set had a mix of fund managers, CIOs and CEOs from asset management companies, investment advisors and wealth management units. Geographically, 40% of survey participants were from North America (Canada and the US), 33% were from Europe, 20% from Latin America and 7% from Asia. Within Europe, 40% were from the UK, 40% from Switzerland and 20% from other locations. Survey Participants - Geographical distribution North America 40% Lat-Am 20% Switzerland UK 13% 13% Other EU Asia 7% 7% 19% 6% Survey Participants - Profile 25% Investment Advisors Asset Management Company Wealth Management Others 50% 14
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