A global survey of pension plans shows that 91 percent of institutional investors have confidence they can achieve target returns in the next five years, a notable improvement in perspective, according to Pyramis Global Advisors, a Fidelity Investments company.

But beyond the increase in confidence levels—only 65 percent of institutions believed they would meet near-term objectives when surveyed in 2012—there are wide regional differences on volatility expectations and faith in alternative investments.

Only 7 percent of U.S. institutions expect volatility to decrease, and 42 percent expect it to increase. Far more Asian and European institutional investors are expecting a decrease in boom-bust market cycles.

U.S. institutional investors say their top concern is funding status, with a majority of pensions saying they intend to improve it.

But they don’t plan to increase their investments in alterative assets to achieve that goal, according to Pyramis.

Only 22 percent of surveyed U.S. institutions plan to increase allocations to illiquid alternatives over the next two years, and 31 percent of those institutions say hedge funds are the most likely investment class to underperform.

There is a huge gap in how U.S. institutions perceive the value proposition of alternative investments relative to their global counterparts. Only 19 percent of U.S. plans say the expensive fees that come with hedge funds and private equity are worth paying, whereas 91 percent of Asian investors and 72 percent of European investors are comfortable with the fees.

Clearly, U.S. institutions are re-evaluating the risks and rewards with alternatives, according to Derek Young, vice chairman of Pyramis Global Advisors.

“U.S. institutions are preparing to move back to a more traditional, back-to-basics portfolio,” he said.

In the U.S., the primary focus on improving funding status is much stronger with public plans, given their systemic funding issues relative to private defined benefit plans. Almost two-thirds of public plans are focused on improving their funding status, whereas only 37 percent of private plans feel the need to do so.

European and U.S. investors report favoring North American over emerging Asian markets in the mid-term, while 71 percent of Asian investors are expecting the emerging markets in their own backyard to outperform the rest of the globe.

Pyramis surveyed 811 institutional investors in 22 countries, including 191 corporate plans and 71 public plans in the U.S.

Instant Insights /

U.S. institutions confident in markets, not alternatives

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