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Investors Worried about Financial Repression as Policy Decisions Drive Global Markets

Survey results show more than 66% of investors want asset managers to prioritize a deeper understanding of the debt crisis and its hidden risks and opportunities

June 17, 2013 (Des Moines, Iowa) — Central bank policy decisions will be the primary factor driving global markets in the next three years, according to 62% of those surveyed in an annual, independent report released today by CREATE-Research and commissioned by Principal Global Investors.

The report, now in its fifth consecutive year, also highlights worries about of financial repression—caused when interest rates are kept low for a long duration—distorting asset allocation decisions.

Titled Investing In A Debt-Fuelled World, the report discusses the challenges facing global financial markets imbued with ultra-low interest rates, heavy uncertainty and investors who lack direction. The report seeks to document the force of this undercurrent and its impact on investing in this decade.

“Politics, more than economics, will drive the markets. Rather than try and beat the markets, investors will target specific solutions that will meet their unique needs. Alpha will be in the eye of the beholder,” said Prof. Amin Rajan, CEO of CREATE-Research and the report’s author. “Asset managers will need to manage expectations of what can be delivered: 61% of survey respondents want asset managers to avoid unrealistic claims about returns and 55% agree that expectations could be managed more effectively.”

The report surveyed over 700 asset managers, pension plans, pension consultants, fund distributors and fund administrators from 29 countries with a combined AUM of $27.4 trillion and was followed by 100 interviews.

Key findings

  • More than two-thirds of investors wanted asset managers to prioritize a deeper understanding of the debt crisis and its hidden risks and opportunities.
  • 49% of those interviewed said they would prefer an integrated solution for asset allocation, manager selection and investment options.
  • A parallel shift into defined-contribution (DC) plans that combine the best of today’s plans with new innovations in response to personalization of risk. Today, DC plans hold 43% of global pension assets. By the end of this decade, this share will exceed 60%.
  • The transition has already prompted asset allocation strategies to evolve. Survey respondents identified a shift to real assets—the biggest single change from this annual study’s 2012 edition.
  • Over the next three years, 45% of survey participants believe DC investors will pursue a dynamic asset allocation strategy. 62% of DC investors themselves reveal they would choose to pursue balanced/multi-asset class funds.
  • DC plan members will increasingly distinguish between beating the market and meeting their needs, defined as the most enduring legacy of the 2008 crash.
  • DB members will continue to move away from diversification strategies that target returns and move toward outcome-oriented investing.

“With more and more individuals now taking on the risk of saving for retirement, they are moving dramatically toward advice-embedded products. Beating a market index may not help an investor meet their goals, which tends to be defined as preserving purchasing power in retirement,” said Barb McKenzie, chief operating officer of Principal Global Investors. “Institutions are also more focused on matching their liabilities in order to reduce risk and are worried more about the impact of inflation on their portfolio than at any time in recent memory. As a result, the move toward real assets to protect against inflation is underway.

“The asset management industry will need to assist plan sponsors and financial intermediaries with how to communicate investment expectations for this new generation of solutions-oriented products.”

» The full report is available at create.principalglobal.com.

About CREATE

CREATE-Research is an independent think tank specialising in strategic change and the newly emerging business models in global asset management. It undertakes major research assignments from prominent financial institutions and global companies. It also undertakes advisory work for senior decision makers in reputable organisations across Europe and the U.S.

Its work is disseminated through high profile reports and events which attract wide attention in the media. Further information can be found at www.create-research.co.uk.

About Principal Global Investors

Principal Global Investors is a diversified asset management organization and a member of the Principal Financial Group®, with expertise in equities, fixed income and real estate investments, as well as specialized overlay and advisory services. Principal Global Investors manages $292.4 billion in assets[1] primarily for retirement plans and other institutional clients[2].


[1]
As of March 31, 2013
[2]
Principal Global Investors is the asset management arm of the Principal Financial Group® (The Principal®) and includes the asset management operations of the following subsidiaries of The Principal: Principal Global Investors, LLC; Principal Real Estate Investors, LLC; Principal Enterprise Capital, LLC; Spectrum Asset Management, Inc.; Post Advisory Group, LLC; Columbus Circle Investors; Edge Asset Management, Inc.; Morley Financial Services Inc.; Finisterre Capital, LLP; Origin Asset Management, LLP; Principal Global Investors (Europe) Limited; Principal Global Investors (Singapore) Ltd.; Principal Global Investors (Australia) Ltd.; Principal Global Investors (Japan) Ltd.; Principal Global Investors (Hong Kong) Ltd.; CIMB-Principal Islamic Asset Management Sdn. Bhd.; and the majority owned affiliates of Principal International, Inc. Assets under management includes assets managed by investment professionals of Principal Global Investors under dual employee arrangements with other subsidiaries of The Principal and assets managed in accordance with investment advice provided by Principal Global Investors through the delivery of a model. 

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