Large institutional investors expect to embrace active management in 2016 to combat macro-economic trends, anticipated market volatility and divergent monetary policy, a new BlackRock survey has found.
During December 2015, BlackRock polled over 170 of the firm’s largest institutional clients, representing USD6.6 trillion in AUM, about potential changes to their asset allocations in 2016. The findings also indicated investors are increasingly embracing illiquid assets, including private credit and real assets, as a way to meet their long-dated liabilities.
“Recent market volatility is driving a repricing of assets globally. The ripple effect from recent events is causing investors to actively manage risk and seek alternative sources of returns,” says Mark McCombe, Senior Managing Director and Global Head of BlackRock’s Institutional Client Business. “Investors are attempting to look past the current market environment and find alpha generating opportunities that match their liabilities.”
Illiquid and alternatives strategies continue to attract clients seeking additional sources of return
The sectors that saw the largest increase in investor interest were long-dated illiquid strategies. Led by private credit, with over half of the respondents indicating an increased allocation, and closely followed by real assets (53 per cent increase/4 per cent decrease/+49 per cent net), real estate (47 per cent increase/9 per cent decrease/+38 per cent net), and private equity (39 per cent increase/9 per cent decrease/+30 per cent net) clients expressing demand for the return premia offered by illiquid assets.
For US and Canadian institutions, the shift towards illiquid assets is occurring as they reduce their allocations in equities. Investors based in Europe, the Middle East and Africa (EMEA) are limiting their exposure to cash and fixed income, while increasing their exposure to real estate and other real assets.
Despite the muted returns in 2015, allocations to hedge funds remain fairly steady globally, however there are significant differences regionally. Overall, institutions globally intend to slightly increase allocations (20 per cent increase/16 per cent decrease/+4 per cent net) and US/Canada institutions intend to increase allocations (30 per cent increase/19 per cent decrease/+11 per cent net). That contrasts with their EMEA counterparts, who intend to decrease their allocations to hedge funds (6 per cent increase/15 per cent decrease/-9 per cent net).
Globally, allocations to equities appear to be decreasing, with some regional disparity. Respondents globally are planning to decrease their equity allocations (18 per cent increase/33 per cent decrease/-15 per cent net). However, the trend is significantly more pronounced in US and Canadian institutions with half of the respondents planning to reduce their equity allocations. For institutions in EMEA, reductions to equity allocations are more muted (24 per cent increase/28 per cent decrease/-4 per cent net).
When asked how they plan to manage their equity exposures, 25 per cent of respondents said they planned on increasing their allocations to active managers as compared to 16 per cent looking to increase index-based allocations.
Within fixed income, institutions are anticipating modest reductions to their fixed income portfolios (24 per cent increase/30 per cent decrease/-6 per cent net) with the majority of that reduction coming from their core allocations (14 per cent increase/32 per cent decrease/- 18 per cent net). Assets are flowing out of core allocations as assets flow into higher yielding sectors such as private credit (55 per cent increase/5 per cent decrease/+50 per cent net) securitized assets (31 per cent increase/7 per cent decrease/+24 per cent net) and US bank loans (27 per cent increase/4 per cent decrease/+23 per cent net).
This trend is more pronounced in Europe, where a net of 17 per cent of responding institutions are forecasting lower fixed income allocations (19 per cent increase/36 per cent decrease/-17 per cent net). Within fixed income, 44 per cent of EMEA clients plan to decrease their core allocation (with 13 per cent planning to increase) and 58 per cent plan to increase their investments in private credit (with 5 per cent planning to decrease). Also within fixed income, 36 per cent plan on increasing their allocation to US bank loans (with no respondents planning to decrease) and 34 per cent planning to increase unconstrained fixed income (with 3 per cent planning to decrease).
McCombe adds: “Many investors are looking to illiquid assets to insulate themselves from market volatility and reap the rewards of illiquidity premia.”
