Carl Hess, global head of investment consulting at Watson Wyatt, said: "While the long-term effects of this global crisis will take some time to manifest, it is crucial for investment professionals to be thinking ahead so as to develop and implement winning strategies that add value for their clients in an increasingly unpredictable and competitive marketplace. The views expressed by this influential group give us some valuable insights and should inform how, why and when key investment decisions are made."
According to the survey, which was conducted at the end of 2008, managers hold overall bullish views of returns on public equities, investment grade bonds, high yield bonds and emerging markets over the next 5 years. However, for the same time horizon, they hold fairly bearish views of returns on hedge funds, government bonds, money market and real estate, while remaining largely neutral on private equities and currencies.
Regarding equities, respondents expect stock markets to revert to historical return levels by 2012, while predictions about returns in 2009 vary significantly by region. According to the median view of managers, anticipated returns on global equities in 2009 is 6.7% with U.S., U.K., Eurozone, Australian, Japanese and other Asian equity markets expected to deliver 8.8%, 5.0%, 5.5%, 8.0%, 5.0%, and 10.0%, respectively. The survey also shows expected equity volatility for 2009 in the elevated range of 20-25%, higher than the historical average but lower than that experienced during 2008.
With regard to bonds, the survey indicates that real yields on government securities, both short and long-term, are likely to remain low and comparable to the depressed levels of late 2008. However as the global economy recovers, government yields are expected to increase while corporate spreads shrink correspondingly - this shift being in a 100 to 200 basis point range and taking three years to complete.
In terms of the tools required for investment success in 2009, managers' top three are: adequate risk controls, portfolio diversification, and added value through active management, while they expect the top issues among their clients to be risk management, asset allocation and underperformance.
The survey also covered managers' macroeconomic forecasts, and reveal a consensus about a recovery in the US housing market being underway by the third quarter of this year; about the same time as the start of a recovery in the other main markets. However, a significant number of respondents indicate that problems could linger until 2012 in the Japanese housing market. Regarding the crude oil price, the consensus is that it is expected to reverse its current sharp downward trend and move to around US$60 a barrel during 2009 and to US$80 a barrel in 2012. Regarding the medium-term general economic outlook, managers are sanguine and expect real GDP to return to robust growth globally; unemployment rates to return to normal; and inflation, accompanied by increases in interest rates, to return.
Carl Hess said: "Not unlike the views expressed by some of these investment managers, we have great expectations that the trauma of the past 18 months will have positive and lasting influence on institutional fund investing, if some lessons are learned. Chief among these would be: pension plan investing really is a long-term game and that investment behavior should genuinely mirror this; that the governance capability of a fund should determine the sophistication of its investment strategy; that risk is multi-faceted and deserves multiple metrics for its measurement and monitoring; and that alpha will always be in short supply and only reliably available to the very best investors. Regardless of managers' optimism, which is an enduring - and sometimes endearing - characteristic of the industry, I think it will be lessons like these, put into practice in 2009, that will give pension plans the edge they need in a fast-changing, competitive investment world."
