Institutional investors are reconsidering their asset allocation strategies as continued volatility within global markets has revealed weaknesses in investment portfolios, according to a recent State Street paper.
The vision paper, 'The Asset Owner's Perspective: Evolving Investment and Operational Models' demonstrates that investors are utilising new approaches to liquidity management to modify their portfolio mix, as well as balance the need for liquidity with the need for returns.
The top actions taken by asset owners to address the 'liquidity crunch' include more vigorous stress testing and the revisions of liquidity-related investment policies, the paper said.
Fixed income investing remained a growth area among defined-benefit pension plans: 39 per cent of corporate plans surveyed expected to increase allocations to corporate investment-grade debt and 30 per cent of public plans anticipated expanding allocations to emerging market debt investment in the coming year.
"Many asset owners are now placing liquidity high among their priorities for asset allocation decisions and re-revaluating their liquidity management approach," said Dan Farley, senior managing director and chief investment officer at State Street Global Advisors' Investment Solutions Group.
"This has led to the adoption of new asset allocation frameworks that focus on optimising the trade-off between risk and return, based on the unique characteristics of each portfolio. Asset owners must carefully consider their approach to this equation and consider more dynamic methods of generating returns using various liquidity strategies," Mr Farley said.
The paper revealed that 84 per cent of respondents still consider the endowment model of investing a highly effective framework for today's markets.
In addition, 45 per cent of asset owners reported that low yields on traditional assets had increased their organisation's appetite for alternatives, particularly among institutions at the smaller end of the market.
Mr Farley said the two greatest challenges for asset owners currently were risk management and investment complexity, both of which needed to be met head on with increased transparency and new technologies to help investors manage complex exposures.
State Street's Vision Series addresses key trends and developments impacting the financial services industry.
