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The dispersion of expected annual performance narrowed with 60% of respondents expecting a return of between 5-8%. Over a three-year period, performance expectations were slightly lower with an average annual forecast for the S&P 500 Index over the next three years of 6.25%, compared with last year’s 7.1%.
“The data indicates a level of realistic optimism that’s both refreshing and important,” said Verne Sedlacek, president and CEO of Commonfund. “Additionally, despite recent discussions surrounding emerging markets, we were pleased to see that investors have a positive viewpoint towards it, in addition to other long-term strategies.”
Portfolio performance Participants reported overall expectations for annual performance of institutional portfolios over the next one, three, and fi ve years:
• Average 7.3% and a median 7% for one year versus an average 7.6% and a median 7.0% last year;
• Average 7.5% and a median 7% over three years versus 7.3% and a median 7.0% last year;
• Average 7.7% and a median 8% over fi ve years versus 7.4% and a median 7.0% last year.
Tail risks Participants were also asked about tail risks over the next three years. 44% said that tail risks are increasing versus 38% last year; 11% said they are decreasing versus 13% last year; and 45% said they are staying the same versus 49% last year.
The most signifi cant tail risks reported relative to portfolio performance over the next three years have shifted greatly from a national concern to predominantly international. Not surprisingly, 58% of respondents cited geopolitical crisis as the most signifi cant tail risk. The gridlock in Washington, which as the number one concern last year, decreased signifi cantly from 62% to 37% this year.
Turmoil in the Middle East increased to 55% versus 46% last year, and a slowdown in China increased from 26% to 46%.
Markets/indices performance Although it dropped from 2013, emerging markets showed a tempered level of confi dence among investors with 58% of respondents expecting the MSCI Emerging Markets Index to outperform the S&P 500 Index over the next three years, compared with 78% last year. In a big increase from last year, 42% expect the MSCI-ex. US (developed equity markets) to outperform, versus 23% last year. 26% of respondents expect commodities, as measured by the Dow Jones – UBS Commodities Index, to outperform the S&P 500 Index over the next three years, compared with 27% last year. 29% of respondents expect hedge funds as measured by the HFRI Fund Weighted Composite to outperform, compared with 26% last year.
Sentiment towards bonds had a slight upward shift with 5% of respondents expecting the Barclay’s Aggregate Bond Index to outperform the S&P 500 Index over the next three years, compared with 3% last year.
8% of respondents expect high-yield bonds as measured by the Merrill Lynch High Yield Bond Index to outperform versus 7% last year.
US treasury yields Survey participants’ expectations for the yield on the 10-year US Treasury note by year-end 2014 refl ect a modest increase in interest rates from current levels. With the 10-year US Treasury at 2.8% as of early March 2014, the average and medium expectations from survey respondents see the fi gure at 3% over the rest of the year.
Approximately 19% expect little change or a slight decline, while more than one-third expect yields to rise to the range of 3.25-3.50%. Last year, respondents expected the average yield of the 10- year Treasury to be 2.1% by year-end 2013.
Asset allocations Unsurprisingly, 13% of respondents indicated they expect to decrease allocations over the next 12-18 months in their emerging markets equities compared to only 3% last year.
Although it is a decline, a signifi cant amount, 42% of respondents, expect to increase allocations compared to 55% last year. European equities realised the biggest jump in expected allocations with an increase from 18% in 2013 to 29% this year.
Areas of greatest concern Commonfund asked participants to assess 10 different factors and asked them to rate their concern about these factors, relative to the management of their assets. Respondents answered along a fi ve-point scale with “1” being “no concern”; “3” being “modest concern” and “5” being “extreme concern”. Far and away the two greatest areas of concern (based on respondents rating factors as a “4” or a “5”) were market (investment) volatility and shortfalls in meeting return objectives.
Although down slightly from 56% last year, market volatility was acknowledged as a concern by 54% of respondents this year. Shortfalls in meeting investment return objectives ranked second again this year, but dipped slightly to 42%, from 48% last year.
The factors of least concern to respondents this year (rating of a “1” or a “2”) were: portfolio liquidity with a rate of 66% versus 62% last year; and defl ation: 64% versus 76% last year.
Investment approach This year Commonfund asked whether or not clients are planning to increase their use of funds of funds in their investment strategies. One in four respondents expect to increase their use of private capital funds of funds. For both hedge funds and private capital, more than half do not expect a change. THFJ
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