There’s a global shift in the asset allocations of institutional investors afoot toward riskier, less liquid assets, according to a recent survey.
bfinance’s latest Pension Funds & Insurance Asset Allocation Survey of institutional investors in Europe and North America finds that among core asset classes, the three-year outlook for equity continues to slide while bullishness toward fixed income increases, with 22% of respondents planning to increase allocation to bonds.
While bfinance’s spring 2009 survey found that pension funds favoured equities as the global recovery appeared to take hold, they were also beginning to move down the liquidity scale, investing into riskier assets and diversifying into alternatives. According to the latest poll, investors are carrying through with this diversification process with the largest net increases in allocation in currency (6%), single hedge funds (4%), absolute return strategies (4%) and infrastructure (4%).
Short term belongs to private markets
When asked about their allocation for the coming six months, respondents identified the leading beneficiary as infrastructure (16%), while 30% of investors intend to increase their allocation to this asset class over the next three years.
“We have been involved in quite a number of meetings with large institutional investors on both sides of the Atlantic, and it is clear that there is a desire to bolster allocations to infrastructure,” says David Vafai, CEO of bfinance. “Its long-term investment horizon is highly attractive for investors such as pension funds seeking liability-matching assets.”
Property and private equity are also set to enjoy a lift in the short and medium terms, with 20% and 10% of investors signalling their intention to increase allocations, respectively, over the next six months. Over three years, 9% of investors intend to increase their allocation to property, while 19% plan to increase their allocation to private equity.
While commodities (21%), portable alpha (14%) and absolute return strategies (18%) also have positive three-year outlooks, the future of equities is decidedly less bright.
According to the survey, investors are planning a 17% and 37% decrease over the next six months and three years, respectively. Allocations to fixed income remain steady in the short term with only a 2% increase in allocations expected over the next six months, but the three-year outlook jumps to 22%.
“Together with infrastructure, commodities, portable alpha and absolute return strategies are set to be the beneficiaries of a change in investor preferences away from equity,” says Vafai. “Viewed on their own, many of these less liquid strategies carry more risk. Combined together, they provide a sought-after diversifier.”