Large institutional investors are set to put cash to work in 2017, a BlackRock survey has found, with one in four (25 per cent) intending to decrease their cash allocations during the year, twice as many as those who plan to increase cash holdings (13 per cent).
The survey shows a clear trend that this cash will be deployed in 2017, with institutional investors anticipating making significant shifts to less liquid assets. Investors are also looking to allocate to higher yielding areas, and are increasingly considering non-traditional asset classes.
The survey of 240 institutional clients globally, representing over USD8 trillion in assets, explores how these investors plan to rebalance assets in 2017, and was one of the first polls of institutional investor sentiment following the election of Donald Trump as US President in November. Over the last three years, the survey has highlighted that institutional clients are increasingly shifting into less liquid assets, a trend that has continued this year.
“The recent equities rally has been more than off-set by years of low rates and many institutions are still suffering from underfunding. In the past year, investors have been challenged by global equities underperformance and negative fixed income returns. On top of this added pressure to deliver returns, reflation is set to take root this year and could well be the final prompt that institutions have needed to rethink their cash allocations and views on risk. The tide of institutional investor interest in less liquid assets is turning into a wave, with a significant uptick in allocations anticipated as they seek alternative ways to generate returns and income,” says Edwin Conway (pictured), global head of the institutional client business at BlackRock.
Real assets are anticipated to be the largest beneficiaries of institutional asset flows in 2017, with 61 per cent of those surveyed expecting to increase their allocations here. Only 3 per cent of investors plan to decrease allocations. On a net basis, taking into account increases minus decreases, 58 per cent of institutional investors globally will be increasing allocations to real assets. This compares to 49 per cent (net) who expected to increase their allocations in 2016.
Investors across all regions are planning increases to real assets in 2017, with the most significant increases expected from Continental Europe (69 per cent net) and the UK (63 per cent net) where approximately two thirds of investors expect to up their allocations. This is closely followed by Asia Pacific (APAC) with 63 per cent net. Over half of institutional investors in the US & Canada (+53 per cent net) and over a third of those in Latin America (36 per cent net) expect to increase exposure to real assets.
Real estate is also set to see significant interest, with 47 per cent of investors globally looking to increase allocations to the asset class, and only 9 per cent looking to decrease allocations (+38 per cent net). The most significant increases are expected to be seen in APAC (+61 per cent net), followed by Continental Europe (+56 per cent net). Over two fifths (+42 per cent net) of Europe, Middle East and Africa (EMEA) investors will increase their real estate holdings, closely followed by Latin America (+39 per cent net) and the US & Canada (+29 per cent net).
The outlook for private equity flows is also looking positive, with almost half of global investors (48 per cent) planning to increase their holdings, and only 13 per cent looking to reduce allocations (35 per cent net). This trend is apparent across all regions. Over half of investors in APAC expect to make increases to private equity (+52 per cent net), followed by Latin America (+47 per cent net) and Continental Europe (+44 per cent net). Around a third of investors across EMEA and in the US & Canada will look to increase their private equity holdings (+33 per cent and +32 per cent net respectively).
Conway adds: “Institutional investors are recognising that they need to do something different to get the investment outcomes they want. With market volatility and lower returns expected from traditional asset classes for the near future, investors are having to look elsewhere for yield. They are increasingly seeking alternative income, and are embracing less liquid strategies to enhance returns. Many alternative asset classes, such as long lease property, infrastructure and renewables, are able to provide inflation protection, along with secure income streams, to take care of investors’ need for cash flows.”
Within fixed income, there is a clear global trend showing a move away from core assets and towards strategies with the potential to yield higher returns. Private credit is the clear frontrunner for fixed income, across all regions and investor types, as the area where institutions expect to increase holdings (61 per cent), with only 4 per cent looking to decrease slightly (58 per cent net).
Credit strategies more broadly are set to benefit from a rebalancing of assets away from core and core plus (-10 per cent net). US bank loans are expected to see an increase in allocations from investors (26 per cent net), followed by high yield (23 per cent net), securitised assets (22 per cent net) and emerging market debt (19 per cent net).
Looking at fixed income allocations as a whole, there are some significant variations by region. While institutional investors in APAC and the US & Canada expect their allocations to remain broadly flat, those in Europe expect theirs to decrease. This is driven mainly by investors in Continental Europe where 43 per cent (net) expect to reduce their fixed income exposures.
Globally, corporate pensions are decreasing their allocations to hedge funds (-22 per cent net), especially in the UK and the US, and moving towards long duration bonds, likely pointing to de-risking trends. Insurers are also following suit, with a decrease of 12 per cent in allocations to hedge funds globally, and increased favourability towards real assets and real estate. Latin America proves to be the only exception on a regional basis, with moves expected into private equity (+47 per cent), real assets (+36 per cent), real estate (+39 per cent) and hedge funds (+31 per cent).
Globally, one in four investors (28 per cent) intend to increase their allocations to active equities relative to passive equities, with over half (55 per cent) planning to keep their current mix of active and passive strategies constant. 17 per cent intend to increase their allocation to passive strategies.
In terms of equity allocations overall, the shifts differ substantially by region and client type. The US & Canada is the only region in which institutional investors overall expect to reduce their equity holdings (-34 per cent net), largely driven by corporate pension plans. In contrast over a third of institutional investors in Latin America expect to increase their equity allocations (+36 per cent net). Around two fifths of investors in APAC (+21 per cent net) and Continental Europe (+18 per cent net) anticipate making increases. Across EMEA a marginal 2 per cent (net) of investors will increase their equity holdings.