Asset owners lowering return targets

In our penultimate Year of the Rooster prediction, AsianInvestor examines whether institutions will further reduce their investment expectations this year.
Asset owners lowering return targets

Investment returns have undoubtedly been harder to come by in recent years. Interest rates have been way down in Europe, the US and other markets since the 2008 crisis, and the concept of decent risk-free performance is long gone.

But it seems many investors had been denial, taking the view that they simply needed to move into riskier assets to boost performance. That, of course, is easier said than done.

It seems that realisation has dawned. 

Will asset owners reduce their annual return targets this year?
Answer: Yes

The consensus view among more conservative, long-term-orientated institutions and their consultants is that the global economy will not support returns for the next five to 10 years that it managed in the recent past.

That puts strain on current targets, which were set back when investments could be expected to hit double figures consistently on an annualised basis. The lower projected likelihood of returns leaves institutional investors with two options: increase the risk in their portfolios to raise the likelihood of higher returns, or reduce their annual return target.

Pension funds and other liability-driven investors have been reviewing their objectives for the last year or so and many have already reduced their targets by around 0.5% in 2016. Institutions including Australia's Future Fund and Singapore's GIC said last year that returns are set to fall in the coming few years.

However, while returns will likely be subdued in the short-term, the longer-term environment is not as gloomy. The objectives of default pension fund investors have remained broadly the same, given that they only require net returns of 3% or 4% to meet many members’ retirement goals. At a portfolio level, the potential end to record low interest rates is impacting bond holdings and infrastructure valuations (effective proxies for fixed interest).

The expected volatility in investment markets, particularly equities, is likely to result in a greater dispersion of returns in 2017. That has implications for the capital market assumptions that underpin forward-looking asset risk/return forecasts.

While some institutions have dialled back their risk exposures in line with the conservative and cautious investment policy, others see opportunity in the uncertainty that surrounds markets in 2017. Any disappointment in what US president Trump delivers on the growth and deregulation front would exacerbate market swings. This will present buying opportunities for those brave enough and with cash on hand at the right time.

Other predictions for the Year of the Rooster:

Will China A-shares be included in MSCI's emerging-market indices?

Will smart beta be broadly adopted as a mainstream investment strategy?

Will there be any major blowups in the ETF industry?

Which investments will perform best this year?

Will more countries vote to leave the European Union?

Will the Bank of Japan be forced to rethink its 10-year bond yield target?

How many rate hikes will the US make this year?

Will Donald Trump spark a trade war with China?

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