Bondification of Equities Imminent as Risk-Averse Investors Chase Returns

Pragmatism is the new watchword for investors globally, with 70 percent stating they will chase returns, not asset classes, according to the findings from the annual independent survey released today by CREATE-Research and commissioned by Principal Global Investors and its parent company, the Principal Financial Group®.

While two-thirds of respondents remain favorably disposed to equities, they also believe that investing today is about finding what works in a world of near-zero interest rates. This quest for returns is likely to increase demand for defensive stocks at a time when equity risk premiums remain high and volatile and the idea of a “risk free” asset is sidelined at today’s bond valuations.

“The revived interest in equities is being driven by a rebalancing act. Investors are recognizing that future returns for most asset classes will be much lower than in the past but they are also conscious of missing what may be a once-in-a-generation bull market,” said Professor Amin Rajan, CEO of CREATE-Research and the author of the report. “The result will be a ‘bondification’ of equities, as investors chase stocks with good dividends, less debt, strong proving power, free cash flow and a high return on equity.”

The report, Pragmatism Presides, Equities and Opportunism Rise, seeks to address two fundamental questions: what is the latest thinking on the cult of equity and the notion of equity risk premium in today’s environment of artificially suppressed interest rates; and what asset classes are likely to be favored by different investor groups over the next three years.

“Not all equities are expected to be equally favored by investors over the next three years—but a common thread is expected to be the 'bondification' of equities,” said Barb McKenzie, chief operating officer at Principal Global Investors. “This means they will favor quality companies with defensive features like good dividends, less debt, strong pricing power, free cash flow and higher return on equity. Such stocks typically gain more by losing less and outperform over full cycles.”

The findings are based on a survey of more than 700 pension plans, sovereign wealth funds, asset managers, pension consultants and fund buyers across 29 fund jurisdictions, with a combined AUM of $26.8 trillion. The survey was followed by 102 interviews.

Key findings include:

• Pragmatism will drive investors’ appetite for equities
  • 79% of respondents don’t believe the cult of equity is dying, with only 4% believing the opposite.
  • The support for equities varies by region, with North America (88%), Asia (81%) and Europe (79%) leading the pack.
  • The revival of interest in equities will be tempered by one key concern – 63% of respondents expect equities to remain volatile.
• Over the next three years:
  • 65% of investors think equities will remain attractive while yields are low.
  • One in two respondents believe there will be a rotation from bonds to equities.
  • Almost 30% of investors believe pension schemes will increase their allocation to equities – relying on equities to plug their deficits.
  • 70% of survey respondents believe that over the next three years, investors will chase returns, not asset classes.
  • Investors expect the highest returns (7.5%) to come from private equity.
  • Other highly rated asset classes include alternative credit (7%), EM equities (7%), small cap equities (6.5%) and global equities (5.5%).
• Asset prices will be driven by:
  • Slower and uneven growth in the global economy (83%).
  • Negative fallout from the prospective rate-hike cycle in the US (55%).
  • Continued downward pressure on rates from the start of QE in the Eurozone (54%).

“Investors are being practical – they recognize it’s not possible to achieve consistent returns by trying to time the market,” said Julia Lawler, senior executive director of multi-asset allocation at Principal Global Investors. “With interest rates being at historic lows and nearly 70 percent of the world’s investable assets being held by retirees or near-retirees, asset allocation decisions will no longer follow the traditional models.”

The full report is available at: create.principalglobal.com and www.create-research.co.uk.

About CREATE
CREATE-Research is an independent think tank specialising in strategic change and the newly emerging business models in global asset management. It undertakes major research assignments from prominent financial institutions and global companies. It also undertakes advisory work for senior decision makers in reputable organisations across Europe and the U.S. Its work is disseminated through high profile reports and events which attract wide attention in the media. Further information can be found at www.create-research.co.uk.

About Principal Global Investors
Principal Global Investors is a diversified asset management organization and a member of the Principal Financial Group®, with expertise in equities, fixed income and real estate investments, as well as specialized overlay and advisory services. Principal Global Investors manages $342.9 billion in assets1 primarily for retirement plans and other institutional clients2.

About the Principal Financial Group
The Principal Financial Group® (The Principal®)3 is a global investment management leader offering retirement services, insurance solutions and asset management. The Principal offers businesses, individuals and institutional clients a wide range of financial products and services, including retirement, asset management and insurance through its diverse family of financial services companies. Founded in 1879 and a member of the FORTUNE 500®, the Principal Financial Group has $530.3 billion in assets under management4 and serves some 19.9 million customers worldwide from offices in Asia, Australia, Europe, Latin America and the United States. Principal Financial Group, Inc. is traded on the New York Stock Exchange under the ticker symbol PFG. For more information, visit www.principal.com.

1 As of Mar. 31, 2015.

2 Principal Global Investors is the asset management arm of the Principal Financial Group® (The Principal®) and includes the asset management operations of the following subsidiaries of The Principal: Principal Global Investors, LLC; Principal Real Estate Investors, LLC; Principal Enterprise Capital, LLC; Liongate Capital Management LLP; Spectrum Asset Management, Inc.; Post Advisory Group, LLC; Columbus Circle Investors; Edge Asset Management, Inc.; Morley Financial Services Inc.; Finisterre Capital, LLP; Origin Asset Management, LLP; Principal Global Investors (Europe) Limited; Principal Global Investors (Singapore) Ltd.; Principal Global Investors (Australia) Ltd.; Principal Global Investors (Japan) Ltd.; Principal Global Investors (Hong Kong) Ltd.; CIMB-Principal Islamic Asset Management Sdn. Bhd.; and the majority owned affiliates of Principal International, Inc. Assets under management includes assets managed by investment professionals of Principal Global Investors under dual employee arrangements with other subsidiaries of The Principal and assets managed in accordance with investment advice provided by Principal Global Investors through the delivery of a model.

3 “The Principal Financial Group” and “The Principal” are registered service marks of Principal Financial Services, Inc., a member of the Principal Financial Group.

4 As of March 31, 2015.

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