Commonfund Forum, currently being held in Hollywood, Florida, released its annual survey data today showing that institutional investor expectations for 2014 remain positive. Commonfund conducted its fourth annual Commonfund Investor Outlook Survey™ which gauges the sentiments of the more than 500 participants attending at the 2014 Commonfund Forum. This year’s data was collected from 200 attendees representing a broad range of nonprofit institutional investors and pension funds with combined assets of $163 billion.
Overall, investor expectations for 2014 are reasonably strong with an average forecast for the S&P 500 Index of 6.5 percent and a median forecast of 7 percent. This represents a slight decrease from last year’s average forecast of 7.9 percent and a median forecast of 8.0 percent.
The dispersion of expected annual performance narrowed with 60 percent of respondents expecting a return of between 5-8 percent. 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 percent, compared with last year’s 7.1 percent.
“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.”
Participants reported overall expectations for annual performance of institutional portfolios over the next one, three, and five years:
* Average 7.3 percent and a median 7 percent for one year vs. an average 7.6 percent and a median 7.0 percent last year;
* Average 7.5 percent and a median 7 percent over three years vs. 7.3 percent and a median 7.0 percent last year;
* Average 7.7 percent and a median 8 percent over five years; vs. 7.4 percent and a median 7.0 percent last year.
Participants were also asked about tail risks over the next three years. 44 percent said that tail risks are increasing vs. 38 percent last year; 11 percent said they are decreasing vs. 13 percent last year; and 45 percent said they are staying the same vs. 49 percent 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 percent 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 percent to 37 percent this year. Turmoil in the Mideast increased to 55 percent vs. 46 percent last year, and a slowdown in China increased from 26 percent to 46 percent.
Although it dropped from 2013, emerging markets showed a tempered level of confidence among investors with 58% percent of respondents expecting the MSCI Emerging Markets Index to outperform the S&P 500 Index over the next three years, compared with 78 percent last year. In a big increase from last year, 42 percent expect the MSCI – ex US (developed equity markets) to outperform, vs. 23 percent last year.
26 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 27 percent last year. 29 percent of respondents expect hedge funds as measured by the HFRI Fund Weighted Composite to outperform, compared with 26 percent last year.
Sentiment towards bonds had a slight upward shift with 5 percent of respondents expecting the Barclay’s Aggregate Bond Index to outperform the S&P 500 Index over the next three years, compared with 3 percent last year.
8 percent of respondents expect high yield bonds as measured by the Merrill Lunch High Yield Bond Index to outperform vs. 7 percent 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 percent as of early March 2014, the average and medium expectation from survey respondents see the figure at 3 percent over the rest of the year. Approximately 19 percent expect little change or a slight decline, while more than one-third expect yields to rise to the range of 3.25-3.50 percent. Last year respondents expected the average yield of the 10-year Treasury to be 2.1 percent by year-end 2013.
Without much surprise, 13 percent of respondents indicated they expect to decrease allocations over the next 12-18 months in their emerging markets equities compared to only three percent last year. Although it is a decline, a significant mount, 42% of respondents expect to increase allocations compared to 55 percent last year. European equities realized the biggest jump in expected allocations with an increase from 18 percent in 2013 to 29 percent 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 percent last year, market volatility was acknowledged as a concern by 54 percent of respondents this year. Shortfalls in meeting investment return objectives ranked second again this year, but dipped slightly to 42 percent, from 48 percent last year.
The factors of least concern to respondents this year (rating of a “1” or a “2) were:
* Portfolio liquidity: 66 percent vs. 62 percent last year
* Deflation: 64 percent vs. 76 percent last year
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.
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Founded in 1971, Commonfund is devoted to enhancing the financial resources of long-term investors including nonprofit institutions, corporate 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 highly flexible investment solutions in four strategic areas: Private Capital, Hedge Fund Strategies, Holistic Outsourced OCIO and Multi-Asset Programs. All securities are distributed through Commonfund Securities, Inc., a member of FINRA. For additional information about Commonfund, please visit www.commonfund.org.