Large institutional investors are likely to make significant shifts in asset allocation in 2015 in response to divergent market and macro-economic trends, a survey finds.
The poll of 169 of BlackRock’s largest institutional clients (representing US$8 trillion in assets) shows these investors are focused on growth rates in developed economies, divergent monetary policies and the potential for deflation.
As a result, respondents predicted significant moves in their portfolios towards alternative investments and less traditional fixed income strategies that aim to provide returns across varying market conditions. Senior investment professionals at the surveyed institutions also expressed concerns about escalating geopolitical tensions.
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“Mixed economic growth forecasts and shifting monetary policies are significant challenges for our clients,” says Mark McCombe, senior managing director and global head of BlackRock’s institutional client business. “These conditions are testing investors’ ability to generate sufficient returns to meet their long-term liabilities.”
“In today’s environment, we advocate proactive risk management,” he adds. “We believe institutional investors should also consider alternative and non-traditional asset allocations, particularly longer dated ones that allow institutions to ride out the expected near-term volatility.”
Senior investment professionals expressed increased appetite for allocations to real assets, real estate, private equity and unconstrained fixed income. Six in 10 anticipate increasing allocations to real assets and approximately half plan to add to real estate (50%) and private equity (47%).
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Conversely, more than a quarter (26%) anticipate decreasing allocations to cash and 39% will decrease investment in fixed income. Fixed income portfolios are also changing, as many investors are moving out of core and long duration strategies while increasing allocations to unconstrained (35%), emerging market debt (38%), U.S. bank loans (33%) and securitized assets (23%).
The trend towards alternatives isn’t new, but what’s surprising is the level of conviction institutions towards physical assets like real estate and infrastructure, McCombe says.
“We believe many institutions are structurally under-invested in real assets, and it is great to see they are more bullish on these strategies than they were 12 months ago,” he explains. “The moves in fixed income are also significant and highlight the importance of manager selection and mandate flexibility in a time of yield scarcity.”
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Canadian and American respondents’ reactions to the sustained bull market in equities were to reduce their exposure with 39% indicating they will decrease equity allocations. Additionally, 20% of respondents in this region plan on reducing cash holdings.
As with their counterparts around the world, alternative strategies and assets are attracting interest, with more than one-third of the respondents saying they would increase investment in private equity (46%), real estate (34%) and real assets (53%).
In Europe, senior investors are even more bullish on real assets and real estate. Sixty-nine percent anticipate increasing allocations to real assets against 2% saying they would decrease allocations, while 66% plan to add to real estate versus 9% who said they would decrease allocations. Thirty-six percent intend to increase allocations to private equity against 14% who would decrease, while contrary to the global trend a net 9% said they will increase allocations to public equities (40% to increase versus 31% to decrease).
Read: Institutions increasing investments in real assets
In fixed income, European institutions again demonstrated high convictions regarding moving out of core and long duration investments into unconstrained 47% increase, emerging market debt (44%) and U.S. bank loan strategies (47%).
In the Asia-Pacific region, institutions are showing similar appetites for increasing allocations in real assets (64%), real estate (54%) and private equity (43%) as their global peers while 44% of them anticipate moving out of fixed income. Within fixed income, allocations to high yield and long duration are expected to decrease, with unconstrained (41%), emerging markets (38%) and short duration (32%) gaining favour.