By Bill Kelly, CEO, CAIA Association
Earlier this year, we surveyed the CAIA Association Membership to ascertain their views on investment-related topics as we step into 2019. We had well over 1,000 responses which, according to the statisticians, puts us in the 95% confidence interval, plus or minus 3%. The respondents’ geographic breakdown tracked the home region of our broader Member base, and about one third self-identified as allocators or pension consultants, 40% as asset managers, and the balance fell into academia, regulatory or other professional pursuits.
The survey covered a lot of ground and this post will attempt to capture some of the highlights, which were also simulcasted via YouTube from the CAIS conference on the Grand Cayman Island last week.
The allocation trends by our Members indicated (on average) a 15% decrease in capital to alternative asset classes in 2019. The only outlier being a much more modest expected decline in infrastructure investments where only 8% indicated a pull-back here; no surprise, infrastructure was also the leader in increased allocations where 53% of our Members said that they saw more capital moving into this space. Interestingly, all the so-called asset classes showed considerable positive trends averaging well over 40% of our Members saying they would increase allocations in the surveyed areas. Preqin conducts a similar annual survey and a benchmarking comparison here was quite telling. While there were no significant differences on the “decrease” side of the ledger, the Preqin respondents were showing a more muted increase in allocations to alts, averaging +25% across asset classes vs. the +46% according to the CAIA respondents. The most significant difference here was in the area of Hedge Funds where the conviction of CAIA Members was 3x what the Preqin survey showed. Here, it might be more about the phrasing where our survey went with a more inclusive definition of “Hedge Funds” by encompassing tail risk, crisis alpha, and any other hedging tools to be deployed.
We also examined 3-year nominal returns for a widely diversified portfolio. Forty percent of our Members said that their expectations were in the +3 to 5% range. Views from here, however, were not normally distributed, as another 40% predicted annual returns above 5%, including 2% expecting to compound into double digits. With this latter group, we did not survey any correlation to investment decisions re cannabis, but here it is likely that this cohort might be inhaling as they contemplate this emerging asset class? On the other side of the curve, the remaining 20% indicated nominal compounding below the 3% level, with only a tiny percentage of perma-bears looking for a red number.
The digitization trends indicated a solid but still minority view on the use of big data, artificial intelligence, and machine learning where we saw a mid-40ish percentage combined view in the “no” and “not sure” category re use and adoption of these tools in the investment process. Given those results, it follows that opacity was not a concern for over two-thirds of the respondents.
Rounding out these results, the importance of ESG was certainly noted, but still just over one-third of the respondents indicated “no meaningful adoption” of ESG/RI principles. The risk factors topping the worry list were macroeconomic, rates, and geopolitical concerns. Performance dispersion was also surveyed and remains top-of-mind for most of the participants. Finally, 90% of our Members remained solidly in the never-crypto camp.
If there is one overriding takeaway here it can be concisely summed up in six simple letters: ODD and IDD. Diversification might still be a free lunch, but when it comes to the world of alternative asset classes labels will mean much less. Opportunities for alpha will continue to exist in the less efficient and often less liquid parts of the market, but the professional will need to evermore eschew labels, as they must go deeper into what is happening inside of the box.
Seek diversification, education and know your risk tolerance. Investing is for the long term.