Public Fund CIO Survey: Optimizing Resources to Meet Evolving Demands
March 16, 2009

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These are challenging times for public funds. Historically turbulent markets have taken a heavy toll on asset performance and dramatically increased volatility. At the same time, a striking increase in the complexity of global capital markets is forcing chief investment officers (CIOs) to quickly adapt to an investing world characterized by a proliferation of new strategies — particularly in alternative investments — and an ever-expanding universe of structured solutions.
 
The results of the Morgan Stanley Investment Management Public Fund CIO Survey show that the demands associated with this increased volatility and complexity have put a considerable strain on U.S. public funds’ resources by introducing new issues (shortages of specialized staff, increasingly sophisticated risk-management needs) and exacerbating old ones (limitations imposed by politics, investment policies and the time needed to educate boards).

Based on our survey findings, we can draw several conclusions: 

  • In light of tumultuous markets, rising complexity and strained resources, public pension plans have been increasingly relying on external providers for investment advice. Investment consultants represent the primary source of strategic and investment advice, while CIOs tend to look to asset managers for expertise and support in more specialized areas, especially derivatives.
  • Despite the volatile markets, private equity, real estate, hedge funds and non-U.S. equities are among the top asset classes into which CIOs expect to increase their asset allocations over the next two years.
  • Public funds are more willing to pursue strategic partnerships to help them manage their portfolios. These comprehensive relationships represent an effective method for public funds to gain access to specialized knowledge and capabilities.
  • The diversity of risk factors affecting CIOs today has placed risk management at the forefront of CIOs’ concerns. Eighty percent of survey participants identified credit risk as the most important type of risk today, followed by manager risk and market (beta) risk.