Large global institutional investors are looking to protect themselves against downturn risks.

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, according to a new survey by BlackRock.

While 65% of clients plan to leave cash allocations unchanged for the year ahead, the survey shows 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 $7.4 trillion1 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%) 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%) of institutions increasing allocations to the asset class. Over two fifths of institutions (43%) 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”, commented 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 set for inflows, active equities in favour

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%) plan to increase their allocations to hedge funds.

Despite an anticipated overall decrease in equity allocations, almost one quarter of institutions (24%) expect to shift allocations to active relative to index investments, versus 16% that plan to do the opposite.

Alternative credit set to capture fresh capital

Globally the hunt for yield means alternative forms of credit such as private credit remain attractive, with over half of respondents (58%) looking to increase allocations.

Within credit more broadly, emerging markets also find favour, with almost two fifths (37%) looking to increase allocations here. Overall a decrease is expected in core and core plus allocations (28%), a consistent trend in the survey’s year-over-year results.

Edwin Conway adds: “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.”

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Institutional investors set to get cash to work in 2017.

Large institutional investors are set to put cash to work in 2017, a BlackRock survey has found.

One in four (25%) institutions surveyed intend to decrease their cash allocations during the year, twice as many as those who plan to increase their cash holdings (13%).

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 US$8 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 U.S. President in November 2016.

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 offset 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,” commented Edwin Conway, Global Head of the Institutional Client Business at BlackRock.

Less liquid assets favoured

Real assets[i] are anticipated to be the largest beneficiaries of institutional asset flows in 2017, with 61% of those surveyed expecting to increase their allocations here. Only 3% of investors plan to decrease allocations.

On a net basis, taking into account increases minus decreases, 58% of institutional investors globally will be increasing allocations to real assets. This compares to 49% (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% net) and the UK (63% net) where approximately two thirds of investors expect to up their allocations.

This is closely followed by Asia Pacific (APAC) with 63% net. Over half of institutional investors in the US & Canada (+53% net) and over a third of those in Latin America (36% net) expect to increase exposure to real assets.

Real estate is also set to see significant interest, with 47% of investors globally looking to increase allocations to the asset class, and only 9% looking to decrease allocations (+38% net).

The most significant increases are expected to be seen in APAC (+61% net), followed by Continental Europe (+56% net). Over two fifths (+42% net) of Europe, Middle East and Africa (EMEA) investors will increase their real estate holdings, closely followed by Latin America (+39% net) and the US & Canada (+29% net).

The outlook for private equity flows is also looking positive, with almost half of global investors (48%) planning to increase their holdings, and only 13% looking to reduce allocations (35% net). This trend is apparent across all regions.

Over half of investors in APAC expect to make increases to private equity (+52% net), followed by Latin America (+47% net) and Continental Europe (+44% net). Around a third of investors across EMEA and in the US & Canada will look to increase their private equity holdings (+33% and +32% net respectively).

Edwin Conway added: “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.”

Credit exposure increasing

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%), with only 4% looking to decrease slightly (58% net).

Credit strategies more broadly are set to benefit from a rebalancing of assets away from core and core plus (-10% net). US bank loans are expected to see an increase in allocations from investors (26% net), followed by high yield (23% net), securitized assets (22% net) and emerging market debt (19% 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% (net) expect to reduce their fixed income exposures.

Allocations to hedge funds on the decrease

Globally, corporate pensions are decreasing their allocations to hedge funds (-22% 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% in allocations to hedge funds globally, and increased favorability 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%), real assets (+36%), real estate (+39%) and hedge funds (+31%).

Active and passive equity allocations

Globally, one in four institutional investors (28%) intend to increase their allocations to active equities relative to passive equities, with over half (55%) planning to keep their current mix of active and passive strategies constant. 17% 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% 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% net). Around two fifths of investors in APAC (+21% net) and Continental Europe (+18% net) anticipate making increases. Across EMEA a marginal 2% (net) of investors will increase their equity holdings.

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[i] Real Assets (Infrastructure; Commodities; Timber; Farmland; etc.)

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