Faced with low interest rates and relatively high valuations for risk assets, large global institutional investors are looking to protect themselves against downturn risks through maintaining their cash levels and selectively increasing allocations to active strategies.
That’s according to a new survey by BlackRock which finds that while 65 per cent of clients plan to leave cash allocations unchanged for the year ahead, there is an interest in active management among institutional investors, which should play out across a diverse set of alternative asset classes, including illiquid assets and hedge funds, and also within public equities.
The survey of 224 institutional clients globally, representing USD7.4 trillion in assets, found that illiquid or real assets remain the frontrunner within the private market universe for large global institutional investors and are expected to be the largest beneficiary of asset flows. Three fifths (60 per cent) of institutional investors globally are expecting to increase their allocations to Infrastructure and Renewables.
Real Estate is similarly set to gain, with more than two fifths (42 per cent) of institutions increasing allocations to the asset class. Over two fifths of institutions (43 per cent) are looking to increase private equity allocations globally.
“Clients’ intention to reallocate to private markets and other highly active strategies is a recognition that global risks persist and of the value of portfolio managers’ skill. Despite synchronised global growth, our overall return expectations for most segments of institutional investors are well below their return targets,” says Edwin Conway, Global Head of BlackRock’s Institutional Client Business. “Maintaining current cash levels and increasing allocations to active managers may seem counterintuitive. But for many of our clients, it’s their two-pronged strategy for navigating risk and potentially volatile markets.”
Hedge funds appear to be back in favour with investors, who have shifted from an intended decrease in 2017 to an anticipated increase in 2018. One fifth of those surveyed (20 per cent) plan to increase their allocations to hedge funds.
Despite an anticipated overall decrease in equity allocations, almost one quarter of institutions (24 per cent) expect to shift allocations to active relative to index investments, versus 16 per cent that plan to do the opposite.
Globally the hunt for yield means alternative forms of credit such as private credit remain attractive, with over half of respondents (58 per cent) looking to increase allocations.
Within credit more broadly, emerging markets also find favour, with almost two fifths (37 per cent) looking to increase allocations here. Overall a decrease is expected in core and core plus allocations (28 per cent), a consistent trend in the survey’s year-over-year results.
Conway says: “In the current environment of record-high asset performance, we believe that active portfolio decisions need to be taken by institutional investors this year. For several years, we have been talking to clients about the need to embrace alternative strategies as a way to add diverse sources of return, and offset the current rate environment. It’s gratifying to see them continuing to embrace these assets as they slowly become the norm for institutional investors seeking differentiated sources of return, inflation hedging and counter-cyclical investments.”