Institutional investors seeing potential in private assets in turbulent landscape

More than half (52 per cent) of institutional investors said they think a political or world event, such as Brexit, will impact portfolio performance over the next 12 months, according to a survey by Schroders.

And that number is on the rise. The survey, which polled 650 institutional investors with a combined US$25.4 trillion in assets, found 32 per cent said the same in 2017 and 44 per cent did so in 2018. The percentage of respondents that said a global economic slowdown was their biggest concern was also on the rise, reaching 37 per cent this year, up from 27 per cent in 2018.

“Institutional investors can be forgiven for beginning to fear the worst,” said Charles Prideaux, global head of investment at Schroders, in a press release. “A number of geopolitical uncertainties have been hanging over their heads for some time now and it currently is impossible to say if there is any sign of these concerns abating.”

Read: How are trade jitters, geopolitical risk affecting equities?

As far as investor appetite, institutional investor interest in emerging markets has fallen, with allocations dropping from 15 per cent in 2017 to 10 per cent today. The survey also found only nine per cent of respondents said they’re planning to allocate further to emerging markets.

Meanwhile, private assets are pulling investor attention. More than half (52 per cent) of respondents said they plan to raise allocations to these assets over the next three years. North American investors (58 per cent) were the most keen to do so, followed by Asian investors (50 per cent). The two biggest drivers cited by respondents as reasons for the transition to private assets are generating higher returns and portfolio diversification.

Among these assets, 69 per cent of investors said they expect private equity to yield returns of more than five per cent — by far the greatest source of potential returns. Among survey respondents that said they’re planning to up their allocations to private assets, equity was the most popular category at 37 per cent, outpacing private debt, infrastructure and real estate. Investors cited complex fee structures as the biggest challenge in the private asset space, while high valuations were also a major concern.

Read: Geopolitical tensions high on investors’ list when examining emerging markets

Even with significant macroeconomic pressures, survey respondents noted optimistic return expectations, with 57 per cent saying they’re factoring in returns of between five and nine per cent, annualized over the coming five years. However, this is down slightly from last year when 60 per cent of investors said the same. North American investors were more bullish, with 77 per cent anticipating such returns, while just 42 per cent of their European counterparts said the same.

“It is encouraging to see that, despite these challenges, investors’ return expectations — with the exception of those in Europe — remain relatively robust and their holdings periods are remaining stable,” said Prideaux. “Chopping and changing investments, particularly during challenging times, is likely to be detrimental for investors’ portfolios and could lead to disappointing investment returns.”

Read: Why institutional investors should consider private infrastructure projects