Commonfund Forum has released its annual survey data today showing that institutional investor expectations for 2014 remain positive. Overall, investor expectations for 2014 are reasonably strong with an average forecast for the S&P 500 Index of 6.5% and a median forecast of 7%. This represents a slight decrease from last year’s average forecast of 7.9% and a median forecast of 8.0%.
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 five years:
* Average 7.3% and a median 7% for one year vs. an average 7.6% and a median
7.0% last year;
* Average 7.5% and a median 7% over three years vs. 7.3% and a median 7.0% last year;
* Average 7.7% and a median 8% over five years; vs. 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 vs. 38% last year; 11% said they are decreasing vs. 13% last year; and 45% said they are staying the same vs. 49% last year.
The most significant 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 significant tail risk. The gridlock in Washington, which as the number one concern last year, which decreased significantly from 62% to 37% this year. Turmoil in the Mideast increased to 55% vs. 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 confidence 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, vs. 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.
Sentimenttowards 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 Lunch High Yield Bond Index to outperform vs. 7% last year.
U.S. Treasury Yields
Survey participants’ expectations for the yield on the 10-year U.S. Treasury note by year-end 2014 reflect a modest increase in interest rates from current levels. With the 10-year U.S. Treasury at 2.8% as of early March 2014, the average and medium expectation from survey respondents see the figure 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
Without much surprise, 13% of respondents indicated they expect to decrease allocations over the next 12-18 months in their emerging markets equities compared to only three% last year. Although it is a decline, a significant mount, 42% of respondents expect to increase allocations compared to 55% last year. European equities realized 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 five-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: 66% vs. 62% last year
* Deflation: 64% vs. 76% last year
Investment Approach
This year Commonfund asked whether or not clients are planning to increase their use of Fund of Funds in their investment strategies. One in four respondents expect to increase their use of private capital fund of funds. For both hedge funds and private capital, more than half do not expect a change.