Pension funds have lost faith in star managers' ability to outperform markets, and many are sitting on their hands, having yet to decide where to put their money, a senior investment management executive told Reuters.
The schemes have been stung by poor performance from hedge funds and long-only asset managers this year, and some "have higher cash positions than usual because they have fired some managers," said Joe McDonnell of Morgan Stanley Investment Management.
"There is a backlog of investment decisions," said McDonnell, MSIM's head of global portfolio solutions for Europe, the Middle East and Africa (EMEA). McDonnell thinks schemes will have learned not to bank on returns from so-called "alpha", or the extent to which a skilled manager can beat a benchmark index. He says that should be balanced with "beta" returns from index-tracking managers.
"Pension funds have realised they can't rely solely on alpha in traditional markets or in the hedge-fund space to generate returns, even though strategies like 'global macro' have done well," McDonnell said.
"Examining the potential returns for various market segments is just as, if not more important, than seeking out alpha. A balance between the two makes sense." Pension funds discount liabilities using AA-rated corporate bonds, and so high bond spreads have disguised a deterioration in pension-scheme funding, making liabilities seem manageable.
However, when spreads narrow, the funding position will look much poorer. To offset this, McDonnell sees heavy demand from European pension funds for investment-grade corporate bonds.
Many asset managers offer specialist credit products, such as convertible bond funds, to take advantage of increased demand for credit and the opportunities available. But with many pension funds undergoing corporate reviews, and the recession constraining extra funding, McDonnell believes schemes will only invest in new strategies if they feel assured of a pay-off in the medium term.
He said recent market falls might prompt British pension schemes to shift money from UK equities into global shares, but these funds generally did not make sharp shifts in equity allocations.