Private credit might be less attractive than it was last year as investors rush into the market, but there are sweet spots to be found.
The global survey of fund managers, who collectively have assets under management of over $10 trillion, indicates that: the period of recovery in most markets will be protracted; the influence of hedge funds and investment banks will decline significantly while that of pension and sovereign funds will rise; and there will be continued growth in demand for alpha from investors.
Fund managers expect to see their institutional clients opting for more conservative investment strategies as well as prioritizing greater risk control as the main area for improvement in their governance. They pointed to, as their top concerns during the next 10-20 years, inadequate retirement incomes from defined contribution schemes for large segments of the population and greater regulation increasing costs for everyone.
"While the long-term effects of this global crisis will take some time to manifest, it is crucial for investment professionals to be thinking ahead so as to develop and implement winning strategies that add value for their clients in an increasingly unpredictable and competitive marketplace,ö says Carl Hess, global head of investment consulting at Watson Wyatt.
According to the survey, which was conducted at the end of 2008, managers hold overall bullish views of returns on public equities, investment grade bonds, high yield bonds and emerging markets over the next 5 years. However, for the same time horizon, they hold fairly bearish views of returns on hedge funds, government bonds, money markets and real estate, while remaining largely neutral on private equity and currencies.
In terms of equities, respondents expect stock markets to revert to historical return levels by 2012, while predictions about returns in 2009 vary significantly by region. According to the median view of managers, anticipated returns on global equities in 2009 is 6.7% with the US, the UK, Eurozone, Australian, Japanese and other Asian equity markets expected to deliver 8.8%, 5.0%, 5.5%, 8.0%, 5.0%, and 10.0%, respectively.
The survey also shows expected equity volatility for 2009 in the elevated range of 20-25%, higher than the historical average but lower than that experienced during 2008.
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Hesitancy aside, institutional investors eye Australia and Japan as promising geographies for private debt investments within Asia Pacific, with Greater China and Korea on the periphery.
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