Institutions Get Ready for Reflation

inflation eagleBig institutional investors are positioning their portfolios for “reflation,” cutting back on cash positions and upping allocations to less liquid assets like real estate and private equity.

The survey of 240 institutional investors around the world from BlackRock comes in the wake of the U.S. election and reflects investor sentiment around a Donald J. Trump presidency which promises to expand U.S. output. As that happens, the number of institutional investors seeking to put their cash to work has jumped substantially – 25% of those surveyed intend to decrease their cash allocations versus just 13% who plan to increase cash holdings.

Where’s the money going?

Real assets top the list as investors, hungry for returns and grappling with underfunding, shift away from underperforming global equities and negative fixed income returns. Here, the prospect of reflation has offered a different perspective on the overall market. As Edwin Conway, BlackRock’s global head of institutional client business is quoted as saying,

“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…”

A few specifics on where assets are headed:

° Real assets – Globally, 61% expect to increase their allocations here (only 3% plan a decrease) – in the U.S. and Canada, that number is 53%.

° Real estate leads the way – 47% globally plan to up their real estate allocations, however the number is much lower in the U.S. and Canada (just 29%).

° Private equity is also attracting assets – 48% of institutional investors surveyed plan to increase allocations here, with a lower number in the U.S. and Canada (33% and 32% respectively).

° Long lease property, infrastructure, and renewables are also under consideration.

° Credit strategies are also on the rise with private credit leading the way – 61% plan to increase holdings across the board, including U.S. bank loans, high yield. Securities assets, and emerging market debt.

Reduced holdings

Where are institutions cutting back? Hedge funds – corporate pension funds are decreasing their allocations to hedge funds and moving toward long duration bonds. Investors are also looking to increase allocations to active equities relative to passive – over half (55%) plan to keep their current mix of active and passive strategies constant, while only 17% plan to increase their allocation to passive equities.

Specific numbers are below: