Commonfund: Institutional Investor Expectations Remain Positive in 2013

Lynn Russo Whylly's picture

Commonfund Forum, currently being held in Hollywood, Florida, released its annual survey data today showing that institutional investor expectations for 2013 remain positive. Commonfund conducted its third 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 217 attendees representing a broad range of nonprofit institutional investors and pension funds.  The combined assets were $123 billion.

Overall, investor expectations for 2013 are reasonably strong with an average forecast for the S&P 500 Index of 7.9 percent and a median forecast of 8 percent. This was a slight decrease from last year’s average forecast of 8.3 percent and a median forecast of 9.0 percent. However, the dispersion of expected performance is wide with 20 percent of respondents expecting a return of five percent or less and one-third percent expecting a return of at least 10 percent.  Over a three-year period, performance expectations reflect lower expectations with an average annual forecast for the S&P 500 Index over the next three years of 7.1 percent. The dispersion of responses was far less with 43 percent of responses in the range of 7.0 to 8.0 percent.  This is a slight increase from last year’s three-year performance expectations of 6.8 percent, and 72 percent of responses in the range of 5.0 to 8.0 percent.

“Institutional expectations for the markets and select asset allocations such as emerging markets indicate that participants continue to be net positive about 2013 reflecting a sense of stability in the U.S. and abroad,” said Verne Sedlacek, President and CEO of Commonfund. “The data shows that overall concerns about downside risk has been reduced since last year, although respondents are still very worried about achieving their investment return goals.”

Portfolio Performance

Participants reported overall expectations for annual performance of institutional portfolios over the next one, three, and five years:

  • Average 7.6 percent and a median 7 percent for one year vs. an average 7.4 percent and a median 8.0 percent last year;
  • Average 7.3 percent and a median 7 percent over three years vs. 7.2 percent and a median 7.0 percent last year;
  • Average 7.4 percent and a median 7 percent over five years; vs. 7.6 percent and a median 7.0 percent last year.

Tail Risks – U.S. versus Europe

Participants were also asked about tail risks over the next three years. 38 percent said tail risks are increasing vs. 46 percent last year; 13 percent said they are decreasing vs. 9 percent last year; and 49 percent said they are staying the same vs. 45 percent last year.

The most significant tail risks reported relative to portfolio performance over the next three years have shifted greatly from last year.  Not surprisingly 38% of respondents cited the gridlock in Washington on U.S. debt as the most significant tail risk compared with 23% in 2012.  The EU crisis, which was the leading cause for concern last year at 32% declined sharply to just 11 percent this year.  The Mideast crisis/Oil price jump decreased to 12 percent vs. 16 percent, U.S. recession was 5 percent vs. 4 percent and a slowdown China was unchanged at 2 percent.

Markets/Indices Performance

Emerging markets showed a continued level of confidence among investors with 78 percent of respondents expecting the MSCI Emerging Markets Index to outperform the S&P 500 Index over the next three years, compared with 75 percent last year. 23 percent expect the MSCI – ex US (developed equity markets) to outperform, vs. 22 percent last year.

However, only 27 percent 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 44 percent last year. 26 percent of respondents expect hedge funds as measured by the HFRI Fund Weighted Composite to outperform, compared with 30 percent last year.

Bonds continued to drop in expectations with 91 percent of respondents expecting the Barclay’s Aggregate Bond Index to underperform the S&P 500 Index over the next three years, compared with 84 percent last year. Only 3 percent expect bonds to outperform. This was the same as last year.

67 percent of respondents expect high yield bonds as measured by the Merrill Lunch High Yield Bond Index to underperform vs. 37 percent last year.

U.S. Treasury Returns Expected to Remain Low

Survey participants’ expectations for the yield on the 10-year U.S. Treasury note by year-end 2013 were as follows: 37 percent responded between 1.5% and 2%; 46 percent responded between 2% and 2.5%. The average expected yield was 2.1 percent versus 2.2 percent a year ago.

These results were similar to last year, when 33 percent responded between 1.50 percent and 2.00 percent; and 49 percent responded between 2.00 percent and 2.50 percent.

Asset Allocations

Without much surprise, respondents indicated they expect to follow the trend from last year and significantly increase allocations over the next 12-18 in their emerging markets equities, 55% increase compared to 53% last year.  Venture capital, real estate and natural resources all showed an expected increase in allocations with respondents indicating a 47%, 41% and 39% increase respectively.

As anticipated, expected allocations to U.S. Treasury and Core U.S. fixed income strategies dropped to 52% and 43% decreases respectively.

Areas of Greatest Concern

Commonfund asked participants to assess 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.” 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 from 69 percent last year, market volatility was acknowledged as a concern by 56% of respondents.  While, shortfalls in meeting investment return objectives ranked second, but dropped to 48 percent, down from 63 percent last year.

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

  • Deflation: 77 percent vs. 64 percent last year
  • Portfolio liquidity: 62 percent vs. 50 percent last year

Founded in 1971, Commonfund is devoted to enhancing the financial resources of long-term investors including nonprofit institutions, pension plans and family offices through superior fund management, investment advice and treasury operations. Directly or through its subsidiaries—Commonfund Capital and Commonfund Asset Management Company—Commonfund manages nearly $25 billion for about 1,400 clients. Commonfund, together with its subsidiary companion organizations, offers more than 30 different investment programs. All securities are distributed through Commonfund Securities, Inc. For additional information about Commonfund, please visit

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