Large institutional investors expect to embrace active management in 2016 to combat macro-economic trends, anticipated market volatility and divergent monetary policy, according to a new BlackRock survey.
The survey, which polled 170 of the firm’s largest institutional clients, found that investors are also 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,” said Mark McCombe, senior managing director and global head of BlackRock’s Institutional Client Business in a news release. “Investors are attempting to look past the current market environment and find alpha generating opportunities that match their liabilities.”
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The survey also found that the sectors that saw the larges increase in investor interest were long-dated illiquid strategies. Led by private credit, with more 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.
If found that, for Canadian and U.S. 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.
The survey also noted that, despite muted returns in 2015, allocations to hedge funds remain fairly steady globally, though there are significant regional differences. Overall, institutions intend to slightly increase allocations (20% increase/16% decrease/+4% net) and Canadian/U.S. institutions intend to increase allocations (30% increase/19% decrease/+11% net).
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Globally, allocations to equities appear to be decreasing, with some regional disparity, according to the survey. Respondents globally are planning to decrease their equity allocations (18% increase/33% decrease/-15% net). The trend is significantly more pronounced in Canadian and U.S. 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 to increase their allocations to active managers, compared to 16% who intended to look to increasing index-based allocations.
Within fixed income, respondents 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).
According to the survey, 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 U.S. bank loans (27% increase/4% decrease/+23% net).
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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% of respondents said they plan to increase their allocation to U.S. bank loans and 34% said they plan to increase unconstrained fixed income (with 3% planning to decrease).
“Many investors are looking to illiquid assets to insulate themselves from market volatility and reap the rewards of illiquidity premia,” said McCombe.