Trends in Asset Allocation and Portfolio Composition

In its annual Institutional Investment Report, which was released on November 11, The Conference Board provides a comprehensive analysis of the asset growth and portfolio composition of institutional investors operating in the United States. It documents the presence over 30 years of different types of institutional investors in single asset classes such as equity, debt securities, alternative instruments, and foreign securities, drawing on data from a wide range of sources. This year’s report includes definitive data for 2009 and focuses on the impact of the financial market rebound on institutional asset value and investment decisions.

Following 2008’s dramatic decline of the securities markets, by the end of 2009 the investment industry had registered substantial gains across virtually all classes of financial instruments, with total institutional assets rising 14 percent to $25,351.1 billion—a level similar to that recorded between 2005 and 2006. This constitutes an extraordinary upward movement from the 21.3 percent plunge of 2008, albeit still far from the best performances of an industry that between 1995 and 2007 had experienced unprecedented growth of 23.3 percent on an annualized basis. Of course, the historical significance of this finding should also be put in context with the new economic uncertainties and the added market volatility of the last few months.

The following are the other major findings discussed in the report.

Return to confidence by retail investors rewarded investment companies

Mutual funds and other investment companies, which had seen the fastest growth in the last few decades, were hit the hardest by the recent market decline and capital withdrawals, with outflows totaling 30.7 percent of their 2007 asset value, or $2,503.5 billion for the year 2008. For 2009, the asset value for investment companies increased by $1,553.2 billion, an inflow of 11.6 percent of 2007 values. By comparison, in 2009, pension funds lost 10.5 percent of their 2007 asset value whereas insurance companies experienced a 1.8 percent contraction. However, pension funds grew 18.5 percent of their 2008 asset value whereas insurance companies experienced a 6.5 percent annual appreciation.

Even gains did not alter the institutional landscape

At the end of 2009, pension funds were still the leading category, holding 39.9 percent of total institutional assets. Investment companies had regained the market share that appeared to have been lost to insurance companies in 2008. As a result of the risk tolerance improvements of retail investors, insurance companies and savings institutions—which had slightly expanded at the height of the crisis—retracted to levels registered prior to the crisis.

Institutions remained committed to their investment policies

Equities remained the investment of choice for state and local pension funds (which traditionally are long-term investors) and open-end investment companies (which traditionally are more engaged in equity trading activities), whereas life insurance companies invested as much as 63.4 percent of their assets in securities that guarantee a fixed income.

Pension fund managers increased exposure to alternative assets

At the end of 2009, as much as 27.9 percent of total pension fund assets were invested in alternative instruments (an asset class that includes real estate, private equity, hedge funds, and cash equivalents), the highest level seen by the industry to date.

Savings institutions wrote off significant mortgage value losses

Savings and depository institutions are only marginally exposed to equity, but they were penalized by the quality deterioration of certain other asset classes in their portfolios—especially residential and non-residential mortgage loans—which continued in 2009 despite the stock market recovery. In 2009, due to a surge of loan defaults, the share of savings institution assets invested in mortgages plunged to 50.5 percent, from 59.4 percent registered at the end of 2008 and the peak of 69.1 percent at the end of 2006.

Equity portfolio of institutions recovered from 2008 deterioration levels

At the end of 2009, institutional equities had recovered to $10,238.7 from $8,127.3 billion in 2008, their lowest level since the late 1990s. However, when measured as a percentage of outstanding U.S. equities, aggregate institutional positions showed a regression to the ratios that were being reported by The Conference Board a decade ago (50.6 percent, down from 51.5 last year). In comparison, during the 2001-2002 recession, institutions were still holding as much as 51.3 percent of total outstanding equities.

Institutional bond portfolio grew in value and market share

In the last decade, institutional bonds measured as a percentage of total outstanding U.S. bonds had stealthily declined (from 34.4 percent in the year 2000 to the 27.3 percent share registered for 2008). By the end of 2009, this negative trajectory corrected for the first time, with the ratio showing a modest upward movement to 28.1 percent.

New capital injections in alternative instruments

Data shows that the decline experienced by the hedge fund industry in 2008 continued into the first quarter of 2009, but was then reversed by capital appreciations and a renewed flow of investments into the asset class. Fueled by the liquid nature of hedge funds and the outstanding performances of some alternative investment strategies during the market rally that followed the crisis, year-end assets under management were valued at over $1.6 trillion (a 13.7 percent increase over the 2008 level).

Hedge fund industry consolidation still in process

Throughout 2009, despite the formidable return to growth for hedge funds, the number of funds pursuing this type of investment strategy remained at the trimmed level registered during the peak of the recession, indicating that the financial difficulties favored industry consolidation and restructuring. Liquidations of hedge funds and funds of hedge funds amounted to 812 by the end of 2008, and an additional 234 entities closed their operations in 2009.

The full report is available here.