Global insurance firms are embracing risk in their portfolios this year, as they plan to increase allocations to alternative investments such as private equity and infrastructure debt, according to the third annual survey by Goldman Sachs Asset Management released on Monday.
At the same time, insurers plan to reduce allocations to cash and short-term instruments, as well as government and agency debt.
The survey, conducted by GSAM with independent third party research firm KRC Research, covered responses from 233 chief investment officers (CIOs) and chief financial officers (CFOs) representing insurers that invest more than $6 trillion in global balance sheet assets.
More than a third, or 35 percent, of CIOs intend to increase overall portfolio risk, while only 8 percent said they will decrease risk, the Goldman survey showed.
Nearly half, or 48 percent, said low yields are the greatest portfolio risk this year. Insurers, as a result, are highly optimistic about private equity returns over the next 12 months, and continue to believe equities will outperform fixed-income assets in 2014.
“Insurers remain focused on the search for return, but view corporate bonds and public equities as either overvalued or fairly valued,” said Michael Siegel, GSAM’s global head of insurance asset management.
“This is driving CIOs to explore non-traditional asset classes that can offer higher total return potential and compensation for illiquidity.”
GSAM’s insurance asset management group currently oversees $160 billion in assets.
Insurers are able to diversify investment portfolios and allocate to non-traditional assets due to strong industry capitalization levels.
About 29 percent of CIOs said they will raise holdings of infrastructure debt, 28 percent will increase allocation to private equity, 26 percent to commercial mortgage loans, and 26 percent to real estate.
Almost half of CIOs, meanwhile, believe investment-grade and high-yield corporates are overvalued, while about 40 percent say European and emerging market equities are undervalued. Only 7 percent think U.S. equities are undervalued.
More than one-quarter, or 28 percent, of CIOs believe shortening the duration of fixed-income portfolios is the best strategy for managing risk in a rising rate environment.
(Editing by Chris Reese)