Long Term Investors and their Asset Allocation: Where are they now?
The asset allocation decisions of investors are at the core of financial flows between markets, currencies,
What are the fundamental drivers for these decisions?How do we determine whether their influence has been altered by the global financial crisis and the subsequent low interest rate environment in advanced economies? In particular, do changes in investor behaviour pose downside risks for global financial stability?
To set the stage, the longer-term developments in global asset allocation show three main trends:
(i) a gradual broadening of the distribution of assets across countries, implying a globalization of portfolios with a
slowly declining home bias;
(ii) a long-term decline in the share of assets held by pension funds and insurance companies in favour of asset management by investment companies; and
(iii) the increasing importance of the official sector in global asset allocation through sovereign wealth funds and managers of international reserves.
The analysis shows that private asset allocation is driven most strongly by positive growth prospects and falling risks in the recipient countries, while interest rate differentials between countries play a lesser role. The analysis does not, however, imply that capital flows in general do not respond to interest rate differentials, since other components, including investment flows of short-term leveraged investors (such as those from the carry trade)might still be affected by changes in interest rates.
Beyond these longer-term trends and investment drivers, the empirical results and survey responses indicate that asset allocation strategies of private and official institutional investors have changed since the onset of the global financial crisis.
Most importantly, investors are more risk conscious, including regarding the risks associated with liquidity and sovereign credit.
Also, the structural trend of investing in emerging
market assets has accelerated following the crisis; and with many first-time investors taking advantage of the
relatively better economic performance of these countries, the risk of a reversal cannot be discounted if fundamentals
(such as growth prospects or country or global risk) change. For larger shocks, the impact of such reversals could be of the same magnitude as the pullback in flows experienced during the financial crisis.
In touching on the potential effect of regulation on the asset allocation of institutional investors, the chapter suggests that initiatives like Solvency II for European insurance companies may push these institutions away from their traditional role of taking on longer-term risky assets, potentially dampening
the positive impact of one class of “deep pocket” investors.
Regarding sovereign wealth funds and reserves management, the chapter suggests that sovereign asset allocation may provide a counterweight for changing private sector behaviour. As heightened risk awareness and regulatory initiatives push private investors to hold “safer” assets, sovereign
asset managers may take on some of the longer-term risks that private investors now avoid.
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