"Asset managers can play a role in helping investors better understand such strategies and work collaboratively with clients to develop solutions with the right level of security"

Global institutional investors have continued to buy developed and emerging market equities despite concerns about overvalued prices and a likely correction in the near term, new investor behaviour research by State Street Global Advisors (SSGA) has found.

The research, conducted with Longitude Research in January, highlights a number of contradictions as investors, under pressure to meet return expectations and funding commitments and facing a lack of attractive alternatives in other low-yielding asset classes, have been forced to increase their risk appetite.

It canvassed 420 chief executive officers, chief investment officers, portfolio managers and directors at private and public pension funds, endowments, foundations and sovereign wealth funds in America, Europe and Asia Pacific.

The research shows a continued push into equities with 63 percent of global investors and three quarters of Asia Pacific investors increasing their allocations to developed market equities in the six months leading up to the survey.

Almost one in two global investors (48 percent) and 51 percent of Asia Pacific investors surveyed had continued to buy emerging market equities during that time.

Most investors, particularly those based in Asia Pacific, increasingly expect to see a correction of 10-20 percent in developed and emerging equity markets in the near term. While 57 percent of global investors surveyed believed developed markets would contract between 10-20 percent in the near future, that figure rose to 67 percent among APAC respondents.

More than half (57 percent) of APAC investors - in line with the global figure - said they also expected a correction in emerging markets soon.

The main factors they said could lead to a possible correction in all markets were rising geopolitical risk and a slowdown in emerging markets.

Interestingly, despite the widespread expectations of a correction, investors globally showed a high degree of confidence in their ability to withstand a downturn. About 96 percent of APAC investors expressed that view, higher than the 89 percent in Europe and the US.

APAC investors said they had done relatively little to protect their portfolios against a downturn, in contrast to their peers elsewhere. Some 68 percent said they had made no change to their level of downside protection and generally accepted that volatility was the "new normal".

Three out of five APAC investors said they believed hedge fund strategies offered the most effective protection despite the comparatively high cost compared to other strategies.

"Investors are facing a difficult balancing act: while many are concerned about a potential downturn and would prefer to reduce their equities exposure, they need to hold equities if they're going to have any chance of meeting their long-term return expectations," Thomas Poullaouec, SSGA's regional head of strategy and research for Asia Pacific, said.

"But their confidence in being able to weather a sharp correction is potentially misplaced," he said. "As we saw during the global financial crisis, the traditional diversification strategies adopted by a large number of investors have limitations in preventing significant capital losses."

"If investors believe volatility is here to stay, they would be well-advised to address portfolio risk and investigate lower-cost solutions such as investing in low volatility equities, managed volatility indices and objective-based strategies which measure against a desired result rather than a traditional index."

"Asset managers can play a role in helping investors better understand such strategies and work collaboratively with clients to develop solutions with the right level of security," Poullaouec added.

For more information and to read the full research report please click here .

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