Seventy-three per cent of global pension plans are using dynamic asset allocation (DAA) strategies to achieve their investment goals, according to a survey by CREATE Research and Amundi.

According to the report, Dynamic asset allocation on the rise as pension plans face an era of controlled disorder, based on responses from 158 pension plans globally, managing €2.9trn of assets, since 2022, investors have been confronted with unprecedented geopolitical events and market volatility.

According to the report, widespread mispricing of assets has supported the growing appeal of DAA, a strategy that regularly adjusts a portfolio’s asset mix.

Amundi Investment Institute head, Monica Defend, said that pension investors have “entered a new regime of controlled disorder”.

“Portfolios are potentially exposed to opportunities as well as threats, at a time when productivity-enhancing innovations are also creating winners and losers,” she added.

DAA is viewed by respondents as a pragmatic response to changing macro financial regimes and new market conditions.

Key market drivers favouring DAA include disruption from the latest US policies (83 per cent), fears that rising trade tensions will revive inflation (62 per cent) and worries that rising public debt will push up interest rates and harm growth (56 per cent).

Going forward, 84 per cent of respondents predict that the market outlook will elevate the role of DAA, and 75 per cent expect to implement it over the next three years.

However, it will not become an either-or choice between DAA and strategic asset allocation (SAA), as the two approaches mostly complement each other, for now.
According to one survey interviewee, “the role of DAA is to provide a portfolio ballast in high volatility regimes and not supersede SAA.”

Furthermore, the survey found that of those who use DAA strategies, over half (63 per cent) reported it had met their expectations and 37 per cent reported that it hadn’t.

Expectations are centred more on downside protection than on upside performance, with risk minimisation cited as the primary goal by 58 per cent.

As for the upside, the main goals targeted are enhanced risk-adjusted returns (39 per cent), maximising upside performance (34 per cent) and profiting from temporary mispricing in markets (30 per cent). Adjustments in asset allocation are crucial in helping mitigate inflation risks, the report stated.

Respondents plan to implement DAA through a variety of styles. Within the core portfolio, the most popular styles are risk factor investing (58 per cent) and passive funds (53 per cent).

For satellite assets, the use of derivative overlays will be key for over half (57 per cent). Pension plans cite two main reasons for their use of overlays: reducing cost and looking to gain opportunistic exposures.

When it comes to specific asset classes, actively managed developed market (DM) equities are seen as the most amendable to DAA by 52 per cent of respondents, followed by passive DM equities (42 per cent), active emerging market (EM) bonds (39 per cent), and active EM equities (37 per cent).

Within DM, the report stated that European and Japanese assets are likely to be favoured due to perceived under-pricing, greater liquidity and lower volatility. Conversely, emerging market assets are attracting less interest, with the report raising concerns about potential value traps following their recent rally.

As candidates for DAA, interest outside of traditional asset classes of equities and bonds is muted, with only 24 per cent of respondents favouring private market secondaries.

CREATE Research project leader, Amin Rajan, said: “SAA is increasingly exposed to the rollercoasters that whipsaw pension plans. It is no surprise that asset classes that pose higher risk or require longer holding periods have been seen as less favourable.”

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