Institutional Investor Survey Expectations Remain Strong in 2012 According to Commonfund Investor Outlook Survey™

Portfolios are expected to grow an average 7.6 percent over next five years. Expectations for hedge funds remain steady and investors see big increase in emerging market exposure

Commonfund Forum, currently being held in Orlando, Florida, released its annual survey data today showing that institutional investor expectations for 2012 remain strong. Commonfund conducted its second annual Commonfund Investor Outlook Survey™ which gauges the sentiment of the more the 500 participants at the Commonfund Forum. This year data was collected from 222 institutional investors whose combined assets were $239 billion. Commonfund is a prominent investment manager for institutional investors including pension plans, endowments and foundations, among other investors.

Overall, investor expectations for 2012 are reasonably strong with an average forecast for the S&P 500 Index of 8.3 percent and a median forecast of 9.0 percent. This was almost unchanged from last year’s average forecast of 8.55 percent and median forecast of 9.0 percent. Over a three-year period, performance expectations are still strong with an average annual forecast for the S&P 500 Index over the next three years of 6.8 percent, and 72 percent of responses in the range of 5.0 to 8.0 percent. This was slightly lower than last year’s average forecast of 7.3 percent and median forecast of 7.5 percent.

“The positive expectations for the markets and asset allocations indicate that participants continue to be positive about 2012 reflecting the continued improvement in the U.S. and much of the world economies,” said Verne Sedlacek, President and CEO of Commonfund. “Increased allocations to emerging market equities, natural resources, and commodities extend last year’s strong outlook and the recovery from 2008-2010.”

Only 44 percent expect commodities (as measured by the Dow Jones – UBS Commodities Index) to outperform, compared with 61 percent last year. 30 percent expect hedge funds (as measured by the HFRI Fund Weighted Composite) to outperform, similar to last year.

Bonds increased. Only 37 percent expect high yield bonds to lag the S&P 500 Index compared with 49 percent last year. 84 percent expect the Barclay’s Aggregate Bond Index to underperform the S&P Index over the next three years vs. 91 percent last year (only 3 percent expect it to outperform this year vs. 4 percent last year). Relative to the three-year performance expectation for the S&P 500 Index, 75 percent of respondents expect the MSCI Emerging Markets Index to outperform, a slight drop from 79 percent last year. 22 percent expect the MSCI – ex US (developed equity markets) to outperform this year.

U.S. Treasury Returns to Drop

Survey participants’ expectations for the yield on the 10-year U.S. Treasury note by year-end 2012 were as follows: 33 percent responded between 1.50 percent and 2.00 percent; 49 percent responded between 2.00 percent and 2.50 percent. Average expectations were 2.2 percent and a median 2.25 percent. This contrasts with last year, when 60 percent of respondents saw interest rates rising in 2011 and one in four expecting rates, as measured by the 10-year U.S. Treasury Note, to rise above four percent by December 2011 (versus 3.41 percent as of February month-end).

Portfolio Performance and Tail Risks

In a new question this year, participants reported overall expectations for annual performance of institution’s portfolio over the next 1, 3, and 5 years: an average 7.4 percent and a median 8.0 percent for one year; an average 7.2 percent and a median 7.0 percent over three years; and an average 7.6 percent and a median 7.0 percent over five years. Another new question asked participants about tail risks over the next 3 years. 46 percent said tail risks are increasing; 9 percent said they are decreasing; and 45 percent said they are staying the same.

The most significant tail risks participants reported relative to portfolio performance over the next 3-years include: EU Crisis (32%); Washington gridlock on US debt (23%); Oil price jump (16%); US recession (4%); China slowdown (2%); and Other (24%).

Asset Allocations

Respondents expect to increase allocations over the next 12-18 months most significantly in emerging market equities, natural resources, commodities (similar to last year’s results); as well as venture capital and private equity, and real estate. Unlike last year, this year the largest decreases were forecast for U.S. Treasuries; European equities and cash; other decreases include core U.S. fixed income and Japanese equities.

53 percent of respondents said they would increase allocations to emerging market equities, up from 40 percent last year; while only 1 percent say they would decrease allocations this year. Similarly, 44 percent cited that they would increase allocations to natural resources, up slightly from 43 percent last year. 40 percent would increase allocations to venture capital and private equity; up from 32 percent last year. 37 percent said they would increase allocations to real estate, up from 27 percent last year. 34 percent said they would increase allocations to commodities, down slightly from 37 percent last year. 31 percent said they would increase allocations to distressed debt/high yield, up significantly from 18 percent last year. 28 percent said would increase allocations to hedge funds, up slightly from 27 percent last year. 6 percent said they would increase fixed income allocations, up from 3 percent last year.

Areas of Greatest Concern

Like last year, Commonfund asked participants to rate 11 different factors and asked them to rate their concern about these factors, relative to the management of their assets. Respondents answered along a five-point scale with “1” being “no concern”; “3” being “modest concern” and “5” being “extreme concern.” The top three areas of great concern (based on respondents rating factors as a “4” or a “5”) are:

- Market (investment) volatility: 69 percent
- Shortfalls in meeting investment return objectives: 63 percent, up from only 21 percent last year
- Risk management (broadly defined): 38 percent, the same as last year

In contrast, the factors of least concern to respondents this year (rating of a “1” or a “2) were:

- Deflation: 64 percent
- Portfolio liquidity: 50 percent
- Costs of investment management: 39 percent, down from 43 percent last year
- Structure/effectiveness of investment resources (staff and board): 39 percent, down from 42% last year
- Inflation concerns were 28 percent this year, down from 53 percent last year.