Low interest rates and increasing complexity of investments drive overhaul of fund strategies, State Street research shows
Pension funds plan to adopt a more hands-on approach to managing assets, strengthen their governance and lower costs in the coming three years to increase long-term value for members, according to research from State Street.
Eighty-one percent of pension funds plan to accelerate insourcing by increasing the percentage of their portfolios that is managed in-house over the next three years, the survey shows. Pension funds say a move to insourcing is both an attempt to cut costs and a move to increase oversight of their assets.
Gaining a complete picture of their portfolios is difficult due to the complexity in their relationships with asset managers, according to 58 percent of funds that responded to the survey. Just over half (52 percent) say it’s also difficult to ascertain whether an asset manager’s interests are aligned with those of the fund.
An outlook for a difficult investment environment is encouraging more than three quarters (77 percent) of pension funds surveyed to increase their risk appetite over the next three years as record-low interest rates affect their results. The drive for profit will prompt 60 percent of pension funds to increase their allocations to alternative investments: 54 percent say they are considering direct loans, 46 percent plan to invest in real estate and almost two fifths (39 percent) are planning infrastructure investments.
More than half the pension funds surveyed also say they place a ‘high priority’ on strengthening their overall governance in the next three years to emphasize oversight, disclosure and transparency. The trend is spurred by increasing regulation and rising complexity of investments, State Street says.
‘Pension funds’ desire to deliver strong investment returns to their participants coupled with improved oversight and governance is leading to a need for more in-house accountability for asset and risk management,’ says Martin Sullivan, State Street’s head of asset-owner sector solutions for North America, in a press release. ‘This undertaking requires pension funds to carefully evaluate how to achieve a balance of in-house and external talent, tools and technologies.’
