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 $6.6 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,” commented 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% increase / 4% decrease / +49% net), real estate (47% increase / 9% decrease / +38% net), and private equity (39% increase / 9% decrease / +30% 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% increase / 16% decrease / +4% net) and US/Canada institutions intend to increase allocations (30% increase / 19% decrease / +11% net). That contrasts with their EMEA counterparts, who intend to decrease their allocations to hedge funds (6% increase / 15% decrease / -9% net).
Divest from equities, choose active over index-based
Globally, allocations to equities appear to be decreasing, with some regional disparity. Respondents globally are planning to decrease their equity allocations (18% increase / 33% decrease / -15% 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% increase / 28% decrease / -4% net).
When asked how they plan to manage their equity exposures, 25% of respondents said they planned on increasing their allocations to active managers as compared to 16% looking to increase index-based allocations.
Fixed income beyond core/core plus in favor
Within fixed income, institutions are anticipating modest reductions to their fixed income portfolios (24% increase / 30% decrease / -6% net) with the majority of that reduction coming from their core allocations (14% increase / 32% decrease / - 18% net). Assets are flowing out of core allocations as assets flow into higher yielding sectors such as private credit (55% increase / 5% decrease / +50% net) securitized assets (31% increase / 7% decrease / +24% net) and US bank loans (27% increase / 4% decrease / +23% net).
This trend is more pronounced in Europe, where a net of 17% of responding institutions are forecasting lower fixed income allocations (19% increase / 36% decrease / -17% net). Within fixed income, 44% of EMEA clients plan to decrease their core allocation (with 13% planning to increase) and 58% plan to increase their investments in private credit (with 5% planning to decrease). Also within fixed income, 36% plan on increasing their allocation to US bank loans (with no respondents planning to decrease) and 34% planning to increase unconstrained fixed income (with 3% planning to decrease).
Mr. McCombe added: “Many investors are looking to illiquid assets to insulate themselves from market volatility and reap the rewards of illiquidity premia.”