Mike Perry

Key Findings

• Majority of investors (55% Global / 40% NORAM / 62% EMEA / 63% APAC) believe that they can significantly influence the progress of energy transition through investments; alternative energy and new infrastructure projects top the list.
• More than half (55% Global / 60% NORAM / 49% EMEA / 59% APAC) plan to increase exposure to private alternatives, with private credit and private equity allocations as leading choices.
• Corporate debt is the top pick across the fixed income spectrum; almost half of investors (48%) plan to increase allocations to investment-grade fixed income; 40% plan to reduce equities.

Many investors are significantly reformulating their approach to risk management and asset allocation as they diversify their portfolios in response to heightened geopolitical tensions, higher rates, ongoing market volatility and upcoming elections.

“In our regular client engagements and in our recent survey of more than 800 institutional investors, we took a pulse on how $18 trillion of assets will be put to work and managed in the next one-to-two years,” said Mike Perry, Head of Nuveen’s Global Client Group.

“Three clear themes are dominating investors’ focus as they position portfolios in the new regime. First is the huge appetite for exposure to energy innovations and infrastructure projects as the energy transition plays out. The second is private credit and private equity being prioritized among growing allocations to alternatives,” Perry said. “Lastly, as a way to position themselves to take advantage of these timely opportunities, investors are holding portions of their portfolios in higher-quality, liquid fixed income instruments.”

Investors see their influence in the energy transition

More than half (55%) of global investors responding to Nuveen’s annual EQuilibrium Global Institutional Investor Survey feel they can significantly influence the energy transition through their investments, with 57% indicating that they have or are seeking exposure to alternative energy (renewable, nuclear, hydrogen). In addition, 51% are interested in allocating to new infrastructure projects, including new energy storage/grids and battery storage.

Across the Asia Pacific region (APAC), interest in nature-based solutions among corporate pension funds was above average and, in Germany, pension funds showed higher than average interest in carbon credit markets. North American public pensions showed higher than average interest in legacy infrastructure upgrades.

Almost 90% of investors (88% Global/81% NORAM/93% EMEA/89% APAC) are focused on the energy transition in some way. The smallest group, representing 9%, are first movers in the transition. The largest cohort (37%) is “keeping pace,” structuring portfolios to reflect the current energy mix in the economy, while 23% are “getting started” and 19% are doing what is needed to meet regulatory requirements.

“Investors clearly understand their influence, and see government policy and technical innovation as the biggest tailwinds for investments in the energy transition for the year ahead,” said Perry. “Thirty-nine percent consider politicization to be the biggest headwind, highlighting the importance of partnering with active managers who have robust experience sourcing and navigating the most attractive opportunities.”

Private markets deemed attractive

Investors are continuing to allocate to private markets, with 55% (60% NORAM/49% EMEA/59% APAC) planning to increase allocations over the next five years with private credit and private equity allocations as leading choices. The trend, however, is less pronounced than in last year’s survey, when 72% (73% NORAM/67% EMEA/79% APAC) planned to increase to privates.

Some investors also are planning to increase allocations to private real estate (24%), commodities (22%), hedge funds (21%), private placements (19%), timberland and farmland (both 12%).

Public pensions in APAC are leading the way, with 72% planning to increase private investments over the next five years. North American insurers and endowments/foundations are not far behind, at 68% and 71%, respectively.

Private credit and private equity were deemed the most attractive asset classes among investors looking to lean into alternatives, led by North American public pensions (57% plan to increase private credit) and Japanese investors (59% plan to increase private equity). While interest in private credit and private equity is generally strong across all regions, it was not the top pick everywhere: private infrastructure was the top pick for German investors (53%).

Many investors looking to de-risk​

Nearly two thirds (65%) of investors (62% NORAM / 68% EMEA / 63% APAC) surveyed say we are in a new market regime that is reshaping how they manage risk and return. Eight of 10 (81% NORAM / 81% EMEA / 78% APAC) say we have left the era of ultra-low interest rates and are entering a higher-for-longer interest rate environment.

Half of investors (50% Globa l/ 53% NORAM / 48% EMEA / 50% APAC) plan to increase portfolio duration in 2024; in last year’s survey, just 39% of investors were planning to increase duration. At the same time, the percentages of investors planning to increase “inflation risk mitigation” and “cash” have decreased compared with last year’s survey (from 64% to 41% and from 41% to 37% respectively).

For liability-driven investors, higher interest rates and the resultant improvements in funded statuses represent an opportunity to de-risk portfolios by adding duration.

The normalisation of interest rates has created new opportunities for many investors to de-risk, moving away from equity markets toward high-quality public and private fixed income. Compared with last year’s survey, significantly more investors are decreasing equity exposure (40% Global / 33% NORAM / 44% EMEA / 44% APAC) than increasing (28% Global / 25% NORAM / 26% EMEA / 37% APAC).

​Almost half of investors (48% Global / 49% NORAM / 49% EMEA / 44% APAC) say they plan to increase allocations to investment-grade fixed income, likely reflecting investor expectations regarding a coming economic slowdown. Thirty-eight percent plan to increase allocations to private fixed income, where investment grade credit is the top pick.

About one in five investors also indicated that, over the next two years, they planned to increase allocations to public securitised debt (CLOs, MBSs, etc.; 22%) and below investment grade fixed income (high yield, broadly syndicated loans, etc.; 21%).

“Across all fixed income segments, corporate debt is attracting interest from investors. Corporates were the top choice for investors allocating to investment-grade and below investment-grade fixed income markets as well as private fixed income markets. Investors are seeing greater value than before in these fixed-rate debt instruments. And for liability-driven investors, high-yielding fixed coupon bonds have become an attractive way to enhance their liability matching,” said Perry.

While investment-grade corporate credit was the top choice overall for planned private fixed income allocations, there was dispersion across investor types. Insurance companies show a stronger preference for private infrastructure debt while endowments and foundations picked private opportunistic and North American public pensions strongly preferred senior middle market loans.

The post Institutional investors prioritise private alternatives, energy Innovations and infrastructure in new market regime appeared first on AdviserVoice.

Mike Perry

Faced with profound market change, both current and contemplated, institutional investors around the world are taking concerted action to better position their portfolios for the future—from increasing investments in infrastructure and private assets, and reformulating capital market assumptions, to better quantifying the risks and opportunities of climate change and making a commitment to impact investments.

These are some of the primary findings of Nuveen’s 3rd annual EQuilibrium Global Institutional Investor Survey, which explores the insights and actions of 800 global institutional investors.

“Across the board, global investors are reassessing their views on risk and return, and preparing for a new market regime,” said Mike Perry, Head of Nuveen’s Global Client Group. “Institutional investors typically take a measured, incremental approach to portfolio changes. That makes the degree to which investors today are contemplating or making very significant changes even more striking.”

When it comes to their portfolio strategies, 59%of investors around the globe are either “actively rethinking” (31%), “redefining and reallocating” (27%) or setting the reset button on their portfolios. Insurance companies are more likely than other institutional investors to be “actively rethinking,” “reallocating” or “setting the reset button”, with 70% doing so.

Nearly half (48%) are reformulating how they calculate capital market assumptions, 38% are making significant tactical allocation changes and 27% are making foundational changes to their strategic asset allocation.

A world undergoing dramatic change

Investors are responding to an extraordinarily turbulent investment landscape, marked by surging inflation and extreme market volatility, war, climate disasters, and political and social unease. Investors picked energy supply disruptions, population demographic shifts and deglobalisation as key megatrends that will impact their portfolios over the next five years.

In APAC, 84% of investors agree that our world is changing dramatically and portfolio strategies need to keep pace; 77% say that the influence of geopolitics, in particular, on investment strategies is much more significant today than it has been over the last 30 years.

More than two-thirds of investors of APAC asset owners (67%) agree that the current investment environment is like nothing they’ve ever witnessed.

Recognising the need to make significant changes given current market environment, 62% of APAC investors are actively rethinking, redefining and reallocating or setting the reset button on their portfolios.

“The current environment has prompted investors to identify and take advantage of opportunities in sectors they may have previously overlooked,” said Perry. “They’re also focusing on newer, evolving portfolio goals, such as climate risk and impact.”

Dialing up inflation risk mitigation and private investments

Globally, most institutions (64%) are dialing up inflation risk mitigation; 64% expect to employ inflation-fighting strategies for two or more years. “The investor consensus is that inflation will continue to be a threat to portfolio returns through at least 2024,” said Perry.

78% of APAC public pensions are likely to be implementing inflation risks mitigation.

Investors around the globe are looking at a variety of assets to help weather inflation. While the top pick was private infrastructure, other popular choices were public equities, commodities, inflation-linked bonds and private real estate.

Investors are also continuing to lean into private markets. Even with the decline in public market valuations causing portfolio balances to shift more heavily toward private markets, most global investors are planning either a gradual (63%) or significant (8%) increase to private assets over the next five years.

More than half (54%) of APAC investors plan to increase portfolio liquidity over the next 12 months, with 79% planning to increase allocations to private markets over the next five years. This number is even higher for APAC insurers, 90% of whom  have indicated plans to increase allocations to the private markets.

Marked increase in planned alternative allocations, particularly infrastructure

Compared with recent years, interest in alternatives has surged: in 2020 and 2021, about 25% to 35% of global investors said they planned to increase allocations to the major categories of alternative asset classes. In 2022, the numbers grew to the 43% to 58% range.

For APAC investors, private equity was the most commonly picked asset for investors planning to increase their alternative allocation (chosen by 62% of those surveyed), followed by infrastructure (chosen by 61%). They also considered real estate (54%) and private credit (45%) in the planned increased allocation to alternatives.

Investors indicated that they are using infrastructure for a host of solutions. Private infrastructure was the top pick for inflation-risk mitigation and infrastructure debt was one of the top choices for allocations to alternative credit for APAC investors. In addition, infrastructure was picked most often as the asset class investors are prioritizing for their climate risk strategy.

“Investors are turning to infrastructure to help protect portfolios from inflation among other critical needs, such as increasing yield and mitigating climate risk,” said Perry. “Infrastructure’s ability to play multiple roles is a key driver of increased allocations.”

Climate risk management and reporting growing in importance

Globally, most investors either currently (61%) or plan to (22%) consider climate risk when making investment decisions.

“These considerations can result in actions such as investing in new green energy opportunities, reducing allocations to companies or industries with high carbon emissions, and actively engaging with management teams to advocate for more climate-aware policies,” said Amy O’Brien, Nuveen’s Global Head of Responsible Investing.

Of investors considering or planning to consider climate risk, two in three (67%) say climate risk is a key factor in risk management today more so than five years ago.

Globally, 44% say they report on climate risks and metrics and 38% say they are still exploring how to build a reporting framework. Only 16% say they do not report on climate risk to stakeholders or regulators.

“Though most investors are early on in developing specific climate risk reporting procedures, the high percentage of investors focusing on climate risk illustrates just how central it is to many investors’ portfolio objectives,” said O’Brien.

Impact investments aligned with climate strategy goals

78% of investors in APAC consider, or plan to consider, the impact on the environment and society when making investment decisions, this is slightly higher than the global figure, which sits at 74%. Of this group in APAC, 67% agree that impact investments will be an increasingly important allocation for them in coming years.

45% percent of global investors say they expect to get the same return from an impact investment as from a comparable traditional investment; 23% don’t and 32% are neutral.

“Impact investing is still a new area for many investors, but as the number and variety of investments expand and the track record gets longer, it’s becoming more and more important, and investors are becoming more knowledgeable and comfortable with the space,” said O’Brien. “Allocation to impact investments is an issue of both financial performance and credibility – and we can solve for both of those through more robust and standardized measurement, transparency, and reporting.”

Among impact-focused investors globally, 48% of investors globally align impact with their climate strategy goals, so unsurprisingly the top picks for impact investing were energy innovations (69%) and infrastructure projects (62%). But social investments were also selected, with 33% of investors indicating interest in affordable housing.

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