A new survey of 485 investors with assets approaching USD8 trillion from investment consultants bfinance finds that investors are adding new strategies, investing more in private markets and cutting overall costs.
bfinance writes that the average institutional investor has transitioned its investment portfolio to one that is more complex and diverse, and which features a greater proportion of illiquid investments, according to its new global Asset Owner Survey.
Some 485 investors with assets approaching USD8 trillion participated in the study and of those, 66 per cent have added a new asset class to the portfolio, led by private debt, infrastructure, real estate, emerging market equity and alternative risk premia. An additional 9 per cent of respondents plan to do so imminently.
A total of 49 per cent have increased their allocations to private markets, although nearly half of investors are currently underweight versus their allocation target for private markets, citing obstacles such as slower-than-expected capital calls and lack of appropriate opportunities.
The survey found that staffing costs and staff numbers are up, although only 19 per cent of investors have brought more asset management in house; teams are grappling with increasingly prominent ESG issues and substantial changes to risk management.
Meanwhile, bfinance writes that despite greater use of alternative investments, investors appear to have reduced costs and the total fees paid to external managers.
“Renegotiation, mandate consolidation and transaction cost analysis prove to be key tools in the investor’s arsenal, while 31 per cent of investors have shifted towards passive management in the past three years.
“Respondents are particularly likely to be underweight in unlisted infrastructure, although private debt, private equity and infrastructure debt also show high levels of under-investment. The extended time taken to make appropriate commitments, the delay in capital calls after commitments have been made, as well as a lack of attractive opportunities are reasons cited for these underweight positions. Investor demand for popular managers has been strong while high levels of dry powder and strong valuations have extended the average drawdown period considerably, creating a substantial drag on returns.”
The survey found that cost efficiency has been a key priority, particularly given the rising allocations to more expensive and complex investments, and bfinance writes that this study provides one of the first indications that asset allocators’ overall costs are decreasing rather than increasing.
“Only 27 per cent of investors say their overall costs have increased as a percentage of assets, while 41 per cent say they have decreased. Meanwhile, 51 per cent of investors are paying less in total external asset management fees versus 17 per cent who have seen fee spend increase. Unexpectedly, investors that have increased allocations to private markets are among the most successful in reducing costs, along with European and Australian asset owners.
“Although equity managers have borne the brunt of fee reductions, with 53 per cent of investors spending less than they were three years ago, managers of other asset classes have also experienced fee pressures: 29 per cent of investors in private markets have reduced their fee burden (14 per cent increased); 36 per cent spend less on hedge funds (7 per cent spend more) and 41 per cent pay less for their fixed income managers (10 per cent more). Belt-tightening tactics used by investors include fee renegotiation (56 per cent), consolidating mandates with fewer managers (40 per cent) and conducting fee benchmarking studies using external consultants (33 per cent),” the firm writes.
Turning to hedge funds, hedge fund investors are seeking better diversification and 55 per cent have either overhauled their portfolios to reduce directional equity exposure within the last three years or plan to do so this year. Of those invested in hedge funds (56 per cent), 34 per cent have reduced their allocation to this sector over the past three years and 23 per cent have increased allocations.
The survey finds that a significant minority of investors have moved in the direction of passive management or smart beta during the past three years, at 31 per cent and 20 per cent of investors respectively.
Bfinance writes: “However, the majority of investors believe that active will outperform passive over the next twelve months. Greater emphasis on ESG could also favour active management, with nearly half of investors believing that good ESG integration requires an active, as opposed to a passive or systematic, approach.”
ESG considerations are growing in prominence, with 39 per cent stating that it is a ‘high priority’ for their institution and 43 per cent implementing a new ESG policy either in the last three years or this coming year. Larger investors are more likely to prioritise ESG issues, while North American asset owners are considerably less likely to do so. There are significant implications for implementation, including manager selection, where 41 per cent of investors say ESG considerations will play a ‘major’ role going forwards.
The survey found that 33 per cent of investors have increasingly used asset managers for strategic advice, while 23 per cent have increasingly used consultants for asset management services. bfinance reports that the lines between advice and asset management are increasingly blurred, with players on both sides seeking to take ownership of the coveted middle ground: influence over strategic decision-making is, as provides increasingly understand, a key driver of asset management revenues. Yet 45 per cent believe that asset management by consultants represents a ‘conflict of interest’.
Multiple consultant usage is now relatively commonplace, the survey reports, with 57 per cent globally using two or more consultants in the past year and 31 per cent using three or more. This development should be viewed in the context of a climate where investors are hunting for innovation, in-house investment teams are increasingly sophisticated and selective, consulting models are coming under greater economic pressure and conflicts of interest are provoking concerns.
David Vafai, bfinance CEO, says: “At the heart of this report is a fundamental tension. There is a gulf between the returns that many investors require and the widespread expectations for what a traditional portfolio may be expected to deliver through the coming decades. With investors making substantial changes to improve long-term risk-adjusted returns, the job of the investor CIO is getting harder and successful delivery is becoming increasingly reliant on the quality of implementation decisions.
Kathryn Saklatvala, Director, Investment Content and the report’s author says: “Asset owners have been remarkably successful at improving overall efficiency while simultaneously adding complexity, illiquidity, new asset classes and staff, as well as overhauling risk management and introducing new ESG policies. However, visible changes of the type documented in this survey should also raise new questions around governance, and specifically the governance of implementation decisions.”
Peter Hobbs, Managing Director, Private Markets says: “Higher allocations to private markets proved to be one of the key investor trends in the aftermath of the financial crisis, tracked by various surveys and reports in the 2010-15 period. It is interesting to see data from the global bfinance survey confirming that the trend, far from settling down, has continued strongly through the last three years.
“However, implementation is far from straightforward and, while allocations might have continued to rise, investors are finding it increasingly difficult to deploy those allocations successfully. Nearly half of investors in private markets are currently underweight versus their strategic asset allocation and only 12 per cent are overweight. With many investors looking to private markets for return enhancement and diversification, it is increasingly critical to look beyond the asset allocation models and get the implementation right.”
