Institutional Investors Rethink Asset Allocation

A Vision paper from State Street Corporation, “The Asset Owners’ Perspective: Evolving Investment and Operational Models,” says investors are utilizing new approaches to liquidity management to modify their portfolio mix and balance the need for liquidity with the need for returns. State Street’s research found the top actions taken by asset owners to address the liquidity crunch include more vigorous stress testing and the revision of liquidity-related investment policies.  

Fixed-income investing remains a growth area among defined benefit (DB) pension plans. Thirty-nine percent of corporate plans surveyed expect to increase allocations to corporate investment-grade debt, and 30% of public plans anticipate expanding allocations to emerging market debt investments in the coming year. Nearly 84% of respondents still consider the endowment model of investing a highly effective framework for today’s markets. Forty-five percent of asset owners reported that low yields on traditional assets have increased their organization’s appetite for alternatives, particularly among institutions at the smaller end of the market.  

Data integration remains a top operational challenge. Nearly half of respondents cited challenges with achieving a comprehensive analysis of their portfolio, and two-thirds expect their data management needs to increase over the next three years.  

“Many asset owners are now placing liquidity high among their priorities for asset allocation decisions and re-evaluating their liquidity management approach,” said Dan Farley, senior managing director and chief investment officer for State Street Global Advisor’s Investment Solutions Group. “This has led to the adoption of new asset allocation frameworks that focus on optimizing 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.”