Pension funds to play greater role in markets

The consultant survey - which polled global fund managers with a total of over $10bn of assets under management - also indicated their outlook for 2009 was generally optimistic, predicting markets in most regions would begin to recover this year.

The managers said they expected to see their institutional clients opting for more conservative investment strategies as well as prioritizing greater risk control as the main area for improvement in their governance.

Against this backdrop, they also said there would be continued growth in demand for alpha from investors.

Managers indicated inadequate retirement incomes from defined contribution for large segments of the population and greater regulation increasing costs for everyone, as their top concerns during the next 10-20 years.

Watson Wyatt global head of investment consulting Carl Hess said the firm expected the crisis to have positive and lasting influence on institutional investment.

He added: "Chief among these [lessons to be learned] would be: pension plan investing really is a long-term game and that investment behaviour should genuinely mirror this; that the governance capability of a fund should determine the sophistication of its investment strategy; that risk is multi-faceted and deserves multiple metrics for its measurement and monitoring; and that alpha will always be in short supply and only reliably available to the very best investors."

According to the survey, which was conducted at the end of 2008, managers hold overall bullish views of returns on public equities, investment grade bonds, high yield bonds and emerging markets over the next five years.

However, for the same time horizon, they hold fairly bearish views of returns on hedge funds, government bonds, money market and real estate, while remaining largely neutral on private equities and currencies.

In terms of the tools required for investment success in 2009, managers' top three are: adequate risk controls, portfolio diversification, and added value through active management, while they expected the top issues among their clients to be risk management, asset allocation and underperformance.

This comes as a survey by PricewaterhouseCoopers and the Confederation of British Industries showed income and profitability levels in the UK financial services sector fell at record rates as the recession deepens and the credit crunch continues to bite.

PwC said business sentiment fell further in the last months, as a balance of 45pc of the respondents said they were less optimistic about the overall business situation in the financial services sector than they were in September.

John Hitchins, UK banking leader, PwC, said: "Sentiment in the banking sector has seen its greatest fall since the emerging market crisis of 1998. As we move deeper into recession we can expect further declines in activity."