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Investors embrace private assets as geopolitical concerns and global economic slowdown fears soar, says Schroders report

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Geopolitical concerns and fears of a global economic slowdown have soared as investors increasingly embrace private assets, according to Schroders Institutional Investor Study 2019.

The study – which surveyed 650 institutional investors encompassing approximately USD25.4 trillion in assets – has identified a growing apprehension among investors amid a backdrop of increasing macroeconomic uncertainty.
 
More than half of investors (52 per cent) said that politics and world events such as Brexit and trade wars would impact portfolio performance over the next 12 months. This is a marked increase on 32 per cent of investors in 2017 and 44 per cent in 2018.
 
Over a third of investors (37 per cent) also cited a global economic slowdown as the biggest concern, significantly up on 27 per cent a year ago. These findings are perhaps reflective of the continued trade dispute between China and the US, as well as the growing uncertainty ahead of the Brexit deadline.
 
the biggest influence on portfolio performance, although this was to a lesser extent than a year ago. In contrast, factors previously thought to be very influential – such as monetary policy tapering, regulation and the risk of cyber-attacks – have all steadily decreased in importance over the past 12 months.
 
In terms of asset classes, appetite for emerging markets (EMs) has fallen among institutional investors, with allocations dropping from 15 per cent in 2017 to 10 per cent this year. Expected allocations towards EMs over the next 12 months have also slipped to 9 per cent. 
 
Just a third of investors (29 per cent) are holding their investments for 3-5 years, with only 10 per cent remaining invested for a full cycle. This comes as more than half (53 per cent) of investors stated there is a greater need for customised or bespoke products because off-the-shelf funds are failing to meet their organisation’s financial objectives.
 
Driving investors’ returns expectations is their continuing focus on private assets. More than half (52 per cent) expect to raise their allocations to private assets over the next three years. Investors in North America (58 per cent) and Asia (50 per cent) were the most intent on doing so. 
 
Investors globally cited the need to generate higher returns and portfolio diversification as the two biggest factors encouraging them to invest in private assets.
 
Across the private asset spectrum, private equity was viewed as the source of greatest potential returns, with 69 per cent of investors anticipating returns of over 5 per cent. Further supporting this view, out of the main private assets classes, 37 per cent of investors globally are intending to increase their allocations to private equity, markedly ahead of private debt, infrastructure equity and real estate.
 
Investors however cited the cost and complexity of fees as the greatest challenge to investing in private assets, and also flagged high valuations as the primary concern when investing in the asset class.
 
Despite these macroeconomic pressures, investors’ return expectations have, however, remained steady over the past 12 months. The majority of investors globally (57 per cent) are factoring in annual returns of 5 per cent-9 per cent annualised over the next five years. This compares to 60 per cent of investors a year ago.
 
Geographically, the gap between a bullish North America and more cautious investors in Europe has significantly widened.
 
Over three-quarters (77 per cent) of North American investors are estimating returns of 5 per cent-9 per cent, a marked difference to 42 per cent of investors in Europe. 
 
Charles Prideaux (pictured), Global Head of Investment, Schroders, says: “Institutional investors can be forgiven for beginning to fear the worst. A number of geopolitical uncertainties have been hanging over their heads for some time now and it currently is impossible to say if there is any sign of these concerns abating.
 
“It is encouraging to see that despite these challenges, investors’ return expectations – with the exception of those in Europe – remain relatively robust and their holdings periods are remaining stable. Chopping and changing investments, particularly during challenging times, is likely to be detrimental for investors’ portfolios and could lead to disappointing investment returns.
 
“It is incumbent on the likes of Schroders to work in partnership with institutional investors to help them navigate this uncertainty and deliver investment solutions which meet their investment objectives and risk appetites.”
 
Georg Wunderlin, Global Head of Private Assets, Schroders, says: “Institutional investors are increasingly aware that they can afford a higher share of illiquid assets in their portfolios, given their long-duration liabilities. They are therefore looking to capture the illiquidity premium while adding diversification to their portfolios.
 
“Private assets offer a broad investment universe with a wide range of risk and return, correlation, cash-flow, and risk capital characteristics. Private assets portfolios can be tailored to deliver the outcomes needed for each specific investor.
 
“In the current market environment investors are particularly interested in strategies based on ‘deep operational skills’ where performance can effectively be ‘manufactured’ by the responsible investment teams. Examples are small and mid-cap buyouts in private equity or differentiated value-add strategies in real estate. In these areas investment performance is considerably less influenced by market cycles.”

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