European CIO Survey 2014 1 European Institutional Investor Institute What Senior Investors Are Thinking Now 2014 In association with
2 European CIO Survey 2014 European Institutional Investor Institute 2014 Meetings Benelux Pension Fund Roundtable Grand Hotel Huis ter Duin - Noordwijk, The Netherlands 10-11 April 2014 Nordic Pension Fund Roundtable Hotel J - Stockholm, Sweden 20-21 May 2014 UK & Ireland Pension Fund Roundtable Syon Park Hotel - Richmond London, United Kingdom 17-18 June 2014 Swiss, German & Austria Pension Roundtable Hotel (tbc) - Zurich, Switzerland 30-31 October 2014 (tbc)
European CIO Survey 2014 3 Foreword Welcome to the 2014 European CIO Survey. This year s survey was drawn from 132 European institutional Asset Owners and forms part of your membership of the European Institutional Investor Institute. We are aware that many pension funds suffer from what has become known as survey fatigue, as asset managers and research firms seek ever greater insights into the product needs of the market. We hope to have covered some slightly different angles with this survey, and we are indebted to many of the Asset Owners who have taken part for suggesting questions they would like to ask of their peers. While these results focus on European investors, this survey is also being undertaken globally with over 300 Asset Owners participating worldwide; all members of our private online community for senior investment officials, Investor Intelligence Network. Comparative analysis of these global sentiments will be appearing over the first quarter of 2014 on the Manager Intelligence Network. If you have any further questions regarding the results and methodology, or have suggested areas to cover for next year s survey then please get in touch with me. On behalf of Institutional Investor, I wish you a successful 2014 and look forward to welcoming you and your organisation to the four regional pension fund roundtables in this year.. Alex Beveridge Director, European Institutional Investor Institute Institutional Investor t: +44 (0) 207 303 1742 e: abeveridge@iilondon.com www.iimemberships.com Contents European CIO Survey 2014 The Key Findings 4 The Big Picture 5 Not Many Expect to make 4.5% a Year 6 How Investors are Changing their Portfolios 7 Investors are Active in Fixed Income 7 The Gap between Boards and CIOs Grows 8 Investment Staff Teams are Small 9 Spending on Investment Resources is Low 10 External Asset Management Fees mainly under 1% 11 Investors don t Expect a Credit Hiccup 11 Investors are Bullish on Emerging Markets 12 Dynamic and Tactical Asset Allocation is the Norm 13 We See Value Here, But Not There 14 Active Management Beta Over Skill 15 Consultants Not All Are Fans 16 Many Think Consultants are Conflicted 17 Fees Value for Money is Wanted 18 Risk Parity Signs of Scepticism 18 Smart Beta Still of Interest 19 Hedge Funds Too Expensive? 19 Real Assets - Popular but Pricey 20 What Investors Want from Infrastructure 20 Like-Minded Partners Wanted 21 Investments in the Next 12 Months 21 Final Thoughts 22 About the Survey 23
4 European CIO Survey 2014 European CIO Survey 2014 The Key Findings The European Institutional Investor Institute has been carrying out an annual survey among European investors for a number of years. Last year, the survey became a tool of our online forum for institutional investors, Investor Intelligence Network (IIN), carried out among its global membership, which is drawn from over 1,200 institutions; pension funds, endowments and foundations, sovereign funds and central banks. Another change was to make the survey more about CIO s attitudes and views, rather than an in-depth dissection of their portfolios. So these results, which look at the findings from a European perspective, give a snapshot of how investors in Europe view the markets, the products and strategies on offer and issues such as investment fees, the use of consultants and investment intentions. Here s a quick rundown on some of the main findings. Changes Following the GFC The most common change post-gfc has been to risk management (by 50% of investors). Thirty one percent said they are researching new methods of investing and making changes at the margin, while 27% have changed their return targets. Greater reliance on dynamic and tactical asset allocation; 76% say it is either very important or increasingly important. Belief in Emerging Markets Three-quarters think emerging markets will produce significantly higher returns than developed markets for the next decade or more. Seventy percent agree that now is an opportune time to increase EM allocations and 33% see EM equities as the most undervalued asset right now, ahead of EM debt (15%), global equity (14%), real estate (13%) and infrastructure (11%). Views on Active Management Just over 60% agree that active management is becoming more about extracting beta/risk premiums and less about a search for skill. On smart beta, 70% say that they are interested in it. There is also support for risk parity. Infrastructure and Partnerships Thirty-seven percent are considering investing in infrastructure in the next 12 months; 56% are actively exploring partnering with like-minded investors. Investors want better products and more market capacity in infrastructure. Caution on Return Expectations Remains Only 13% think an average real return of 4.5% over the next 10 years is seen as very achievable. Nearly 60% think it is possible but risky for prudent investors. Investors are marginally more positive on return expectations than 12 months earlier. Investment Fees Under Pressure Almost 70% of investors say cutting fees is on their priority list, while 77% won t even consider certain products because the fees would be so high. A third of investors pay less than 0.25% in fees, 40% say that they pay 0.25% to 0.5% in fees. Credit Risk and Illiquidity In order to get the returns they need, investors are taking more credit risk (48%) and illiquid investments (46%). Fixed income duration has been cut by 42% over the last 12 months. Within fixed income allocations, just over a third of investors (35%) are becoming more active. Others Areas Where Investors Are Looking to Invest When asked about investment intentions in the next 12 months, after infrastructure, the leading assets are smart beta, high yield debt, distressed debt, mezzanine debt and secured loans, as well as real estate and EM private equity.
European CIO Survey 2014 5 The Big Picture As the Global Financial Crisis of 2008 begins to fade from sight in the rear-view mirror, has there really been a lasting impact on the way you manage your portfolio? We have changed risk management as a result We are reseraching new methods of investing and making changes at the margin We have changed return targets as a result Not really, we are back to normal and confident of achieving traditional return targets We have completely overhauled the way we invest 0 10 20 30 40 50 2008 was a reminder that traditional portfolio construction methods underestimate tail risks. Therefore, risk management and alternative methods of portfolio construction have our increased interest Senior Investment Strategist, Insurer, Benelux region We are making changes; but not really as a result of the financial crisis. It was in progress anyway; the crisis has just made it harder Chairman of Trustees Board, Corporate Pension Fund, UK
6 European CIO Survey 2014 Not Many Expect to make 4.5% a Year Do you think an average real return target of 4.5% per annum over the next ten years is realistic for an institutional investor? Need to have high weights in alternative asset classes Investment Analyst, Corporate Pension Fund, UK Depends on your risk appetite and skill and ability to pull out of risky assets when expected returns are too low Pension Fund, Nordic region Unlikely (29%) Very achievable (13%) Possible. I'm on the fence (58%) Depends on you being able to invest in illiquid assets and henceforth it depends on the duration of your liabilities and your cash situation (do you have net positive cash flows?) CEO, Large European Public Pension Fund No (42%) Yes (58%)
European CIO Survey 2014 7 How Investors are Changing their Portfolios In the past 12 months, please indicate whether your fund has increased or decreased the following... Equity risk Equity Credit risk risk Fixed Income Credit duration risk Fixed Illiquid Income investments duration Illiquid investments Up No Change Down Up No Change Down Listed Equities Investors are Active in Fixed Income In the past 12 months, have you been moving in the direction of a more active or more passive approach in the two areas specified below: Listed Equities Fixed Income Fixed Income More Passive More Active Unchanged More Passive More Active Unchanged
8 European CIO Survey 2014 The Gap between Boards and CIOs Grows As institutional investors become more professionalised, the gap between boards/stakeholders and CIOs/management teams is becoming wider. Do you agree with this statement from a Sovereign Wealth Fund CIO? 27% Yes, and it's a real concern for the future 44% Yes, but I don't think it's a problem 29% No The work should be concentrated in the hands of the professionals. Boards need to learn to stop playing at being investment professionals and start being effective stewards Chairman of Trustee Board, Corporate Pension Fund, UK I m seeing a build up of management teams sitting between boards and consultants which is a good thing Head of Investments, Public Pension Fund, UK
European CIO Survey 2014 9 Investment Staff Teams are Small What is the ratio of investment staff per billion U.S. dollars of assets? Less than 1:2 (42%) Less than 2:1 but greater than 1:1 (25%) Less than 1:1 but greater than 1:2 (20%) Greater than 2:1 (14%)
10 European CIO Survey 2014 Spending on Investment Resources is Low What is your total spend on investment-related resources (people/systems/infrastructure), expressed as a percentage of fund assets? 70% 18% Less than 0.25% 0.25-0.5% 10% 2% 0.5-1% 1-2% 1% Greater than 2%
European CIO Survey 2014 11 External Asset Management Fees mainly under 1% What is your total spend on external asset management fees expressed as a percentage of fund assets? 1-2% (4%) Less than 0.25% (33%) 0.5-1% (22%) No (75%) Yes (25%) 0.25-0.5% (40%) Investors don t Expect a Credit Hiccup A credit hiccup is coming. High yield debt issuance is the canary in the coal mine. Our base case is that in 36 months, we could see 12% default rate. Do you agree with this statement, from a U.S. public pension fund CIO? No No Yes No I agree on the risk, but would add a few more years CIO, Public Pension Fund, Nordic region
12 European CIO Survey 2014 Investors are Bullish on Emerging Markets Views on Emerging Markets: I expected some slowdown, but I've been surprised by how low EM returns have been over the past year In EM, we are increasingly looking towards the private (unlisted) space EM will be a source of significantly higher returns than developed markets for the next decade and more Now is an opportune time to increase allocations to EM Our EM investing is becoming less general and more sector/country specific
Increasingly important to us (43%) European CIO Survey 2014 13 Dynamic and Tactical Asset Allocation is the Norm How integral is Dynamic/Tacital asset allocation to you? Not for us (24%) Very Important (33%) Increasingly important (43%) Dynamic asset allocation (big moves, long-term time horizon) is very important to us. Tactical asset allocation (market timing, shorter term focus, smaller tilts) is unimportant to us CEO, Corporate Pension Fund, UK
14 European CIO Survey 2014 We See Value Here, But Not There What is the most undervalued and overvalued asset class right now? Most undervalued Most overvalued Credit 5% 13% U.S. Treasuries 4% 40% EM Debt 15% 6% U.S. Equity 5% 14% Global Equity 14% 7% EM Equity 33% 4% Infrastructure 11% 7% Real Estate 13% 9%
European CIO Survey 2014 15 Active Management Beta Over Skill Increasingly, active management will be about extracting appropriate betas/ risk premiums in a systematic, cheap way and less of it will be about the search for skill. Do you agree with this statement? Yes (61%) No (35%) Don t know (4%) Active management will largely be about shifting between different risk premias over time, rather than focus on one (e.g. value or growth etc.). However, this will also require skills from the active manager Public Pension Fund, Nordic region Smart betas will play a bigger role but there is still room for real active asset management (as long as large institutional investors will keep on using market cap indexes) CEO, Public European Pension Fund
16 European CIO Survey 2014 Consultants Not All Are Fans My consultant is a trusted, valuable extension of my team. What are your views on this statement? Other (19%) Yes (42%) No (39%) I use a consultant because I have to. They are very slow to change their offering to fit with the pace of how the investment world is changing Chairman, Corporate Pension Fund, UK Our consultant provides ideas and discusses our own ideas but we are not led by them. As such they are a valuable extension of the team. But I wouldn t say we always trust them! Head of Investments, Large European Public Pension Fund On a good day anyway! But you need to be smart as to how you use the consultant to ensure that you get real advice and not off-the-shelf research which they try to sell to all of their clients CIO, European Corporate Pension Fund You need to have them for fiduciary reasons Global Pension Manager, Corporate Pension Fund, Nordic region
No, their function has not really changed at all (8%) y extended their consulting role (14%) European CIO Survey 2014 17 No, they have simply Many Think Consultants are Conflicted Investment consultants which offer some sort of fiduciary service are now asset managers too. What are your views on this statement? Yes, but it does not impact their impartiality (12%) No, they have simply extended their consulting role (14%) Yes, but it does not impact their impartiality (12%) No, their function has not really changed at all (8%) They are trying to be asset managers, but they don t have the resources or the skill sets to do it properly. Very dangerous in my opinion Chairman of Trustee Board, Corporate Pension Fund, UK
18 European CIO Survey 2014 Fees Value for Money is Wanted Views on fees Performance fees are prone to 'gaming' by managers To get the best active managers, you've got to pay higher fees Cutting the amount we pay out in fees is high on my priority list We won't even consider certain products because the fees would be so high Risk Parity Signs of Scepticism Risk Parity is... On its deathbed. Like 130/30, I doubt we'll hear this term in a few years' time Entering a rough patch but I believe it has longevity, perhaps with a few tweaks Alive and kicking
To get the best active managers, you've got to pay higher fees Cutting the amount we pay out in fees is high on my priority list European CIO Survey 2014 19 We won't even consider certain products because the fees would be so high Smart Beta Still of Interest Smart Beta (in its various forms) is: A long-standing part of our portfolio Something we've entered recently Something we're interested in A bit of a fad Performance fees are prone to 'gaming' by managers To get the best active managers, you've got to pay higher fees Cutting the amount we pay out in fees is high on my priority list We won't even consider certain products because the fees would be so high Hedge Funds Too Expensive? Views on Hedge Funds We pay (at least some of) our managers close to 2&20 Hedge Funds make most of their money from things we can access more cheaply elsewhere
To get the best active managers, you've got to pay higher fees 20 European CIO Survey 2014 Cutting the amount we pay out in fees is high on my priority list We won't even consider certain products because the fees would be so high Real Assets - Popular but Pricey Real Assets? We re: Adding more Keen to add more but struggling with over-pricing More of a seller than a buyer now Not involved Performance fees are prone to 'gaming' by managers To get the best active managers, you've got to pay higher fees Cutting the amount we pay out in fees is high on my priority list We won't even consider certain products because the fees would be so high What Investors Want from Infrastructure Infrastructure: what single change would make it easier to invest institutional money in this space? Bigger market capacity Better products (e.g. stable low returns and low fees rather than private equity structures) Stronger regulatory framework Government or local counterparty bearing more of the risks
To get the best active managers, you've got to pay higher fees Cutting the amount we pay out in fees is high on my priority list We won't even consider certain products because the fees would be so high Like-Minded Partners Wanted European CIO Survey 2014 21 Partnering with like-minded institutional investors to make investments is: Something we've done and found rather challenging Something we're actively exploring Something we'd be interested in Something we're not interested in Investments in the Next 12 Months In the next 12 months, we re considering an investment or mandate in: Smart beta/alternative indices High-yield debt Distressed debt, mezzanine debt or secured loans Real estate property EM Private equity Insurance-linked securities (cat bonds) Frontier market equities EM Fixed income Corporate bonds Agricultural land EM Equities High-dividend equities Structured products eg MBS, CLO Absolute return strategies/funds Infrastructure 37% 26% 21% 21% 21% 19% 16% 15% 15% 15% 15% 13% 11% 11% 11% 0 10 20 30 40
22 European CIO Survey 2014 Final Thoughts The risk of quickly rising interest; rates. When will the next downturn in the equity markets occur? Head of Asset Management, Corporate Pension Fund, Nordic region Both equities and bonds (and many other asset classes) look expensive to us. Given this view, a buy-and-hold approach is likely to end in poor outcomes but active asset allocation is very difficult within the governance structure of a UK pension scheme CIO, Corporate Pension Fund, UK For pension funds, the only risk that really matters is reputational risk; a large part of which is driven by coverage ratio and one-off events. With a solid beta you can manage coverage ratio and defend it as a function of the market Fund Manager, Public Pension Fund, Benelux region Financial repression has just started and governments will try to deflate the debt by maintaining very low nominal interest rates in order to get for some years negative real returns. How long will it last before the pension funds and other life insurance companies blow up? CIO, Large European Pension Fund Implementing strategic change AND keeping the day to day investments working well CEO, Corporate Pension Fund, UK Political mess in Europe (Euro crisis, lack of reform). Political mess in the US (Debt ceiling, political polarisation). Economic transition in China Insurer, Benelux region
European CIO Survey 2014 23 About the Survey This year s survey is based on the views of over 300 global senior investment officials who are members of Institutional Investor s private online community for accredited Asset Owners, Investor Intelligence Network (IIN). Since its launch in 2011, the Network currently has 2,066 senior investment officials from $1 billion plus funds in five regions: Europe, North America, Asia, Middle East and Asia Pacific, making it one of the largest and most active networks of institutional investors in the world. IIN members were invited to complete our online questionnaire from October 2013 for a period of 2 months, with the option of anonymity. The majority of participants, however, provided their full name and institution. This survey was completed by 132 European Asset Owners, out of a total of 584 European funds on IIN, made up primarily of CIOs, CEOs, Heads of Investments and senior investment officials from leading pension funds, endowments and foundations, sovereign funds and central banks. This sample represents 43% of the total global participants with 45% coming from North America and the rest spread across the Middle East, Asia and Asia Pacific. This survey report deals only with the European responses. All graphs are representative only of data we have for each question. European Asset Owner Participants by Fund Type European Asset Owner Participants by Size Corporate Pension Fund 46 Public Pension Fund 32 Insurance 20 Undisclosed 11 Pension Fund-Industry Wide 7 Sovereign Pension Fund 6 Central Bank Reserve 4 Foundation/Endowment 3 Family Office 3 $1bn $10bn 58 $20bn - $50bn 27 Less than $1bn 17 $10bn $20bn 11 Undisclosed 10 $50bn - $100bn 6 Over $100bn 3 NOTES IIN is an investor-only website. To request for an application to join the Investor Intelligence Network, please email Antje Meyer (ameyer@iilondon.com) [Europe], Kathryn Saklatvata (ksaklatvala@iilondon.com) [Asia, the Middle East], Katarina Storfer (kstorfer@institutionalinvestor.com) [The Americas]. Managers who wish to access real-time intelligence on the needs of institutional investors and connect with funds can join the Manager Intelligence Network (MIN). MIN provides an unique window to IIN s private community allowing managers to see what Asset Owners are saying about their needs and challenges in a secure setting. To request for an application to join the Manager Intelligence Network, please email Giorgio Tupini (gtupini@iilondon.com). A global survey report of all responses will be published in Spring 2014.
24 European CIO Survey 2014 Here to help. Your contacts at Institutional Investor: Director, European Institutional Investor Institute Alex Beveridge t: +44 (0) 207 303 1742 e: abeveridge@iilondon.com European IIN Content Director Matthew Craig t: +44 (0) 207 303 1727 e: mcraig@iilondon.com US and Global IIN Content Director Rich Blake t: +1 212 224 3390 e: rblake@iiconferences.com Sovereign and Asia Pacific Content Director Kathryn Saklatvala t: +44 (0) 207 303 1726 e: ksaklatvala@iilondon.com Research Director Katarina Storfer t: +1 212 224 3073 e: kstorfer@institutionalinvestor.com Nestor House Playhouse Yard London EC4V 5EX