Financial market dynamics will push pension funds back towards buy-and-hold investing strategies in the next few years, according to a CREATE-Research survey.

Presenting the results of the survey this morning at the IPE Conference & Awards in Prague, CREATE-Research CEO Amin Rajan said the combination of increased geopolitical risk and high valuations across asset classes had led investors to go “back to basics”.

“Long-term investing will come back into fashion as a matter of necessity as much as choice,” Rajan said.

“In today’s environment there are so many wild variables that the scope for making a mistake is enormous, and the scope for policy missteps is enormous as well. In a situation like that it’s really important to go back to basics.

“There is expectation that risk premia will still exist but will take longer to materialise, and as a result it is best to hang on to your assets for longer than has been the case.”

When asked how a “regime change in investing” would affect time horizons, 44% of the 161 European pension funds in the survey said long-term investing was likely to become more important than it had been in the recent past.

Asset class returns were expected to be “volatile and unpredictable” in the years to come, according to the survey report. This would mean investors needed to increase their holding periods in order to access risk premia.

Rajan added that pension funds saw a return to long-term, buy-and-hold investing as the “only choice”.

“I was quite surprised by this,” he continued. “In our annual survey for the last eight years we’ve seen a move away from buy-and-hold investing in terms of the holding period, particularly for bonds, because people have been worried that this 36-year-long bull market in bonds is likely to be ending as a result of the rate hiking cycle in the US.”

Linked to the shift towards longer investing time horizons, the survey also illustrated the growing importance of environmental, social and governance (ESG) themes within pension fund strategies.

The survey showed investors were using ESG indicators to “discover fat-tail or far-off risks” that were often “unfamiliar to conventional risk models”.

Nearly two-thirds (61%) of respondents said they would increase their allocation towards ESG strategies in the next three years, with none saying they would decrease exposure.

The full report, supported by Amundi Asset Management, is available to download here.

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