Investors have shifted their investing focus from beating the markets to meeting predefined needs, according to a survey conducted for Principal Global Investors. The firm says aging populations and caution are causing various defined-benefit plans (e.g., pensions), defined-contribution plans (e.g., 401(k) plans), individual investors and high-net-worth investors to adopt tailored, goal-oriented and time-based strategies.

Defined-benefit plans are now focusing on inflation protection, low volatility and high income through regular cash flow. They are showing a preference for assets with bond-like features, equity-like returns and a low correlation with traditional asset classes. Three asset classes in particular have seen a “noticeable increase in [defined benefit] investor appetite” over the past two years: real estate, infrastructure and alternative credit.

Defined-contribution plans account for approximately 45% of global pension assets. Over the past two years, these plans have seen notable increases in the usage of target date funds, target income funds and target risk funds. The survey also shows that more defined-contribution participants are sticking to their investment choices instead of opting for annuities.

The biggest investment theme among individual investors was found to be “funds with an income focus as well as a strong focus on yield and downside protection.” This theme has resulted in higher interest for funds with an income focus and hybrid bond mutual funds. These funds use a mix of high-yield bonds, global value securities, global real estate securities, emerging market debt and infrastructure. A big reason is “a larger preference for the high probability of certainty over the low probability of high returns.”

High-net-worth investors’ goals have shifted away from the previous survey’s findings, which had shown a preference for high returns. This group had favored seeking high returns in order to accommodate other goals. Now the group is favoring real estate as its most preferred asset class, the first time this has happened since the annual survey was started in 2009. At the global level, developed market high-net-worth investors are “ultra-cautious,” while emerging market high-net-worth investors are “ultra-demanding.” Finally, the main emphasis for high-net-worth investors overall is absolute rather than relative returns.

Source: “Asset Allocation: No Longer One Size Fits All,” Principal Global Investors, September 2014.