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Institutional investors increase allocations to fixed income and alternatives in the US: Cerulli Associates

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Inflation, market volatility, and lower than expected investment returns challenged institutional investors in the US throughout 2022 and early 2023, yet investors remain optimistic, according to Cerulli Associates. 

In the first half of 2023, there was great uncertainty about whether a recession was imminent. However, 84 per cent of institutional investors expected the economy would avoid a full recession, and many (44 per cent) believed the Federal Reserve would succeed in its attempt at a “soft landing.”  

To adjust to an entirely new and unpredictable investment environment, institutional investors (68 per cent) indicated that they would take advantage of higher interest rates and increase their allocations to public fixed-income investments. According to the research, almost three-quarters of institutional investors (70 per cent) expect to increase their allocations to actively managed fixed-income strategies over the next 24 months. “This presents a significant opportunity for asset managers with strong fixed-income capabilities and performance,” says Chris Swansey, senior analyst. 

Moreover, a majority (55 per cent) of institutional investors are responding to rising interest rates by increasing their allocations to alternative investments. Private credit strategies have become particularly attractive alternative investments—nearly half (47 per cent) expect to increase their allocation over the next 24 months. 

In addition to seeking exposure to public fixed-income and alternative investments, institutional investors are prioritising several factors beyond investment performance. Asset managers can position themselves to win institutional mandates by charting a clear succession plan (43 per cent), having a well-established investment team (41 per cent), and demonstrating expertise through thought leadership (43 per cent). 

“With portfolios designed to enhance returns over the long term, institutional investors are prepared to withstand short-term economic shocks,” says Swansey. “This allows them to be opportunistic during times of market volatility and take advantage of lower-than-normal valuations,” says Swansey. “Managers that offer these exposures and highlight factors beyond investment performance will be well poised for mandate wins in this market,” concludes Swansey.

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