De-risking requirements, regulatory pressures and a low yield environment will drive asset allocation decisions in 2011, according to BlackRock.

Charles Prideaux, Head of BlackRock’s EMEA institutional business, commented: “The need to protect the value of investment portfolios in a challenging environment will lead institutional investors to seek more effective diversification in 2011. We expect to see appetite return for asset classes that investors may have previously shied away from but with a greater focus on risk management and due diligence. Asset managers have a role to play in partnering with pensions schemes, insurers and endowments to educate them on new strategies and to help meet their specific funding requirements.”

Mr. Prideaux outlined ten trends for 2011:

1.     Liability-driven investing continues to grow

The recovering equity markets and regulatory regime in Europe in particular are encouraging a stronger focus on mitigating liability risk as efficiently as possible, and as a result, there will be an increasing number of pension funds looking to adopt a liability-driven investing framework.

2.      The greater use of ‘barbelling’ techniques

Institutional investors are under increasing pressure to bolster efficiency on the asset side in order to obtain better value-for-money. This places a burden on asset managers to achieve more efficient beta, often in combination with higher alpha. ‘Barbelling’ techniques seek to make better use of scarce capital by combining more cost-effective market exposure along with an allocation to high-conviction ideas that offer greater reward potential per unit of risk.

3.      Allocations to alternatives assets rise

Alternative strategies can largely be used to increase diversification within portfolios and enhance risk-adjusted return potential. While this pattern has been evident for several years – with the notable exception of the 2008-09 market dislocation – we expect it to gain further momentum in 2011. However, the quality of risk management will be at the forefront of investors’ minds with more time and resources spent on due diligence.

4.      Diversification – and more diversification

One of the lessons of the financial crisis was that diversification requires dynamically managed exposure to a broad range of asset classes with low correlation and diversified sources of risk: this will increasingly be reflected in investor portfolios.  It will also lead to greater exposure to emerging markets, where institutional investors will look more to incorporate local currency-denominated assets in their portfolios.

5.      Transparency and fiduciary management

The visibility of potential returns from investment positions will remain a top priority in 2011. In Europe, where investors often lack the necessary governance resource or expertise to allocate in a timely and dynamic manner, this trend will be accompanied by a continued move towards outsourcing – from partial to full fiduciary management.

6. Corporate governance takes centre stage

The greater focus on due diligence will also extend to corporate governance and environmental and social (ESG) standards being set in 2011. The investment landscape has placed greater emphasis on the role that good corporate governance can play in securing and enhancing long-term shareholder value.

7. Solvency II

The Solvency II regime will force European insurance companies to restructure their portfolios to improve the diversification of returns and achieve higher yields within the new risk framework. Given the extent of portfolio remodelling required and the need for improved risk management, this is likely to lead to greater strategic use of outsourcing.

8. Growth in Defined Contribution (DC)

With DC pensions increasingly becoming the norm even for senior management, we expect a growing debate in 2011 around the governance and quality of all types of DC schemes. This is particularly evident in the UK, where next year’s introduction of the National Employment Savings Trust (NEST) will lead to even greater emphasis on how these schemes are run.

9. The search for dividend income

Most countries are set to achieve some level of economic growth in 2011, albeit below trend for much of the developed world.  Institutional investors’ search for steady income to ease their funding pressures in light of historically low developed market bond yields will lead  to interest in global equity income strategies, which invest in quality stocks that offer high and sustainable dividend income.

10. Inflation risk hedging

The merits of inflation proofing against anticipated increases in the coming months will increasingly be on investors’ agenda as part of an overall focus on de-risking and protecting portfolios.  This will also lead to a greater demand for real asset classes such as commodities or property that offer some protection against inflation surprises.