NEW YORK--(BUSINESS WIRE)--Institutional risk management strategies are in need of urgent overhaul, according to a study of institutional investors conducted by Allianz Global Investors (AllianzGI), one of the world’s leading active investment managers.
Conducted in the first quarter of 2016, AllianzGI’s 2016 RiskMonitor asked 755 institutional investors about their attitudes to risk, portfolio construction and asset allocation. The firms surveyed represent over $26 trillion USD of assets under management in 23 countries across North America, Europe and Asia-Pacific.
The Risk Monitor report found that since the 2008 global financial crisis, risk management practices have changed very little. Pre-crisis, investors’ top three strategies were diversification by asset class (57%), geographic diversification (53%) or duration management (44%). Despite the fact that 62% of respondents admit these strategies didn’t provide adequate downside protection, their use has actually increased post-crisis, with 58% of investors reliant on diversification by asset class, 56% using geographic diversification and 54% embracing duration management.
As a result, two-thirds of institutions are calling for innovative new strategies to help balance risk-return trade-offs, provide greater downside protection and replace traditional approaches to risk management. In fact, 48% say their organization is willing to pay more if it means access to better risk management strategies and 54% say their organization has set aside additional resources to improve risk management.
Commenting on the findings, Neil Dwane, Global Strategist AllianzGI, said:
"Investors are facing a world where average market returns continue to be lower and volatility is higher. In this environment, fulfilling investment objectives will require taking risk and applying truly active portfolio management, which needs to go hand in hand with an adequate strategy for managing that risk. Unfortunately, our RiskMonitor results show that a considerable number of investors do not show much confidence in their ability to manage risks effectively in both up- and down markets.”
"Encouragingly, institutional investors do seem to recognize the need for more effective risk management solutions. However, it is time for asset managers to innovate and offer solutions and products that will help clients to navigate the low yield environment without exposing them to inappropriate levels of volatility. This can take different forms, but the next few months and years will certainly be a litmus test for the growing offering in sophisticated multi asset solutions.”
Main investment concerns and allocation trends
There are countless risks lurking on the horizon, but a few are on the top of many investors’ minds as they navigate the markets in 2016 and try to meet their return objectives. Globally, 42% of those surveyed say market volatility is their main investment concern. Add to that the other big concerns this year - low yields (24%) and uncertain monetary policy (16%) and there is little doubt that investors may be in for an even bumpier ride compared to the last few years.
In light of the choppy markets at the start of this year, 77% of investors are apprehensive about equity-market risk, citing it as the top threat to portfolio performance this year. Also high on the list of threats that those surveyed believe could derail the performance of portfolios were interest rate risk (75%), event risk (75%) and foreign-exchange risk (74%).
Despite the concerns around market turbulence and equity market risk by institutional investors, many have not been persuaded to take a wide-spread defensive attitude. Institutional investors report their primary investment goal for 2016 is to maximize their risk-adjusted returns. Further, their inclination towards equities suggests their risk appetite has not been completely dampened by the market volatility. In particular, with 29% and 28% respectively, US equities and European equities garner the top spots among the investments earmarked for long exposure again this year.
Notes to the editor:
AllianzGI’s fourth Global RiskMonitor 2016 is based on the responses of 755 institutional investors in 23 countries across North America, Europe and Asia-Pacific representing USD 26 trillion [or EUR 23.8 trillion or GBP 18.5 trillion] of assets under management . They were interviewed via an extensive global survey facilitated by CoreData Research during the first quarter of 2016. In order to understand institutional investor attitudes towards risk, portfolio construction and asset allocation AllianzGI regularly surveys a variety of ‘asset owning’ institutions; pension funds, foundations, endowments, sovereign wealth funds, family offices, banks and insurance companies.
The full report is available for download at: www.allianzgi.com/riskmonitor
About Allianz Global Investors
Allianz Global Investors is a diversified active investment manager with a strong parent company and a culture of risk management. With 25 offices in 18 countries, we provide global investment and research capabilities with consultative local delivery. We have more than USD 495 billion in AUM for individuals, families and institutions worldwide and employ more than 500 investment professionals.
At Allianz Global Investors, we follow a two-word philosophy: Understand. Act. It describes how we look at the world and how we behave. We aim to stand out as the investment partner our clients trust by listening closely to understand their challenges, then acting decisively to provide them with solutions that meet their needs.
As at 31 March 2016
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