An another important article from OECD staff on trends in institutional investor asset allocation strategies. In particular, public pension funds are searching for investments beyond the traditional classes. I think this paper provides a great analysis, but I do have one quibble: unlike Della Croce and Yermo–if I read their conclusions correctly–my co-author Jason Seligman and I see public pension funds as investing in alternative investments like infrastructure not (or at least not merely) as a way to seek alpha, but as a means of smoothing volatility and, sometimes, simply because of herding. Alternatives are not just about alpha. We are presenting our paper at a Federal Reserve conference next week, and will post the paper shortly after.
On to the Della Croce and Yermo paper . . .
The economic downturn is likely to have a lasting impact on the fund management industry and on long term asset allocation strategies of institutional investors. On one hand, in promoting more cautious investment strategies and a greater focus on portfolio risk management in the coming years. On the other hand, the prolonged low-yield environment has heightened the need for return-enhancing strategies, pushing some investors to invest in alternative assets. More fundamentally, the role of institutional investors in long term financing is constrained by the short-termism increasingly pervasive in capital markets as well as structural and policy barriers such as regulatory disincentives, lack of appropriate financing vehicles, limited investment and risk management expertise, transparency, viability issues and a lack of appropriate data and investment benchmarks for illiquid assets such as infrastructure.
Available for download here.