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Institutional Asset Manager Survey: Key trends in institutional asset management 2009-2011 and beyond – Jim McDonald, Chief Investment Strategist, Northern Trust

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In light of the current fiscal and monetary concerns that are gripping the minds of investors around the world, Institutional Asset Manager asked the heads of some of the world’s leading asset managers to share their thinking on portfolio management trends post-Lehman and beyond 2011 in concise fashion.  Jim McDonald, Chief Investment Strategist, Northern Trust, responds:

Overview – Like other institutional investors, Northern Trust has focused intensely on the evolving financial crisis in Europe, the prospects for economic growth in the United States and the sustainability of the boom in emerging markets. The primary driver of our five-year outlook is the ‘debt hangover’ developed economies are suffering through and the possible monetary side effects of the ‘aspirin’ delivered by central banks.

Fixed Income – Cash rates in developed countries will be slow to normalize, while longer-term rates will be somewhat anchored, resulting in a flattening of most yield curves and leading to slightly higher returns than 2010. High yield return forecasts represent the exception to ‘slightly higher return’ trend – with lowered returns resulting from a faster-than-anticipated normalization in option adjusted spreads.

Equities – Corporations’ continued ability to source demand globally will offset somewhat lower economic growth and higher inflation forecasts. Large-cap equities may begin to play a bigger role in investment portfolios with longer time horizons as investors are attracted to the decent dividend yields of multi-nationals and greater inflation protection vis-à-vis fixed income. Small-caps will benefit as credit gradually improves and global access flows down the size spectrum, creating opportunities. We expect emerging market equities will continue to provide attractive returns, justifying higher risks.

Alternatives – We have raised our forecast for private equity returns due to the improved outlook for small-cap equities, a major input for our PE forecast. We also revised hedge funds higher, with an expectation that fund managers will be able to capitalise on the continued financial market volatility.

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