Old Mutual Asset Management's Julian Ide outlines the themes driving institutional investment in 2012.

The institutional market continues to focus on managing risk through splitting allocations between ‘liability matching’ and ‘return-seeking’. Broadly speaking, it is in the latter area that asset managers will aim to provide the greatest value add in return for relatively higher fees.

In fixed income, after a 30-year bull market, investors will require smarter product offerings. These are likely to include greater use of derivatives to provide long/short opportunities, including ‘negative duration’, as well as access to plays on currencies. Government bonds are clearly no longer ‘safe havens’ and they offer only negative returns. This suggests much greater emphasis on corporate bonds, including high yield.

There is a general move in equities away from aggregations of regional markets and into global equities. Return-seeking opportunities in equities are focused on alpha-generation. These can come from any number of sources but are most likely to be found among the most skilled managers working in more volatile areas such as small and mid-cap. These assets provide a hedge against inflation and valuations are currently low. The turmoil of 2011 showed that quantitative strategies may also be worth reconsideration.

We expect increased flows into alternatives as investors continue to search for returns in complex markets, and as improved technology opens access to new areas of opportunity. Single-manager hedge funds are likely to be increasingly favoured, both to reduce costs and improve transparency.