Institutions Pile Into Illiquid Alternatives

diggerBig changes are on the horizon when it comes to asset allocation among the world’s largest institutional investors. According to Fidelity’s Global Institutional Investor Survey institutions say they are planning to make more changes in asset allocation in the next one to two years than they made in 2012 and 2014 — and the big focus is on illiquid alternatives, domestic fixed income, and cash. All told, 72% of institutions plan to pile on more illiquid alternatives in 2017 and 2018. That’s closely followed by 64% who plan to increase allocations to domestic fixed income and 55% who plan to boost their cash holdings.

However, increasingly, asset allocation decisions are being driven by local conditions, both economic and political. In the U.S. for example, institutions are responding to uncertainty by taking a wait and see approach – compared to 2012, the percentage of U.S. institutional investors expecting to move away from domestic equity has fallen significantly from 51 to 28 percent, while the number of respondents who expect to increase their allocation to the same asset class has only risen from 8 to 11 percent. Expectations of higher volatility and lower returns are key drivers behind these asset allocation decisions – both are among top concerns for institutions according to the research.

Given the challenges in the environment, however most institutional investors (96%) appear to be positive about their ability to generate alpha over their benchmarks to meet their expectations for growth. What’s the target they are looking to achieve? On average, institutions are aiming for 6% required return plus 2% alpha every year, with half of their excess return over the next three years coming from shorter-term decisions such as individual manager outperformance and tactical asset allocation.