Funds embrace investment short-termism

An MSCI global asset owners survey covering more than $US 5.5 trillion in assets under management shows funds are taking an increasingly short-term focus and putting a greater emphasis on risk management. The 2011 Global Asset Owners Survey, Back to the Future of Risk Management, which includes 85 participants in 26 countries, also reveals Australian asset owners have substantially higher levels of external management and more funds allocated to equities than asset owners from other countries. Frank Nielsen, MSCI executive director of research, says the number of funds using stress testing has increased by almost 300 per cent since 2009. Participants cite market risk, counterparty risk and liquidity risk as the top three risk concerns. Funds are also becoming increasingly short-term in their outlook, with the majority of funds surveyed shortening their strategic asset allocation horizon from three years to one. Nielsen says the survey reveals that the current uncertainty in markets is producing a short-term outlook and a greater focus on risk management.

“There is a risk that they [asset owners] are basically overreacting now to the recent crisis and have become too dynamic and too responsive and are forgetting that they have a long-term investment horizon,” he says. When it comes to Australian asset owners, 85 per cent of their assets are managed externally, which Nielsen says is a substantially larger proportion relative to other regions. European funds have on average less than half of their assets externally managed while in North America the proportion is just over 60 per cent. Australian asset owners surveyed also have an average of 60 per cent allocation to equities compared to 43 per cent for funds globally.

Australian funds also have substantially less in bonds, allocating 12 per cent on average compared to 37 per cent for funds in other regions. The alternatives allocation for Australian funds is in line with the global average, which is around 20 per cent on average of the portfolio. Almost all Australian funds in the survey invest in hedge funds and require transparency, such as aggregate risk exposures in relation to liquidity and other risk information.