By Poonka Thangavelu
Institutional investors are more inclined to take an active stance to their investments in 2017, and reduce reliance on cash holdings, according to a BlackRock survey of 240 large institutional investors. The New York investment management firm reports that while 25% intend to cut down on cash holdings this year, only 13% planned to increase their cash exposure.
These investors are also looking to chase higher yields and look beyond the core asset classes. They have been moving towards less liquid assets for the past three years, and that trend also is evident in the current survey. In recent years, investors have been hurt by the low-rate environment, which has evened out the recent uptick in stocks. They have also been impacted by the underperformance of global equities and negative returns on fixed-income investments.
And considering the prospect of an inflation pick up this year, institutional investors have become more open to taking on risk, according to the survey. “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,” according to Edwin Conway, Global Head of the Institutional Client Business at BlackRock.
Accordingly, 61% of these investors globally are favoring allocations to real assets such as commodities, timber, infrastructure and farmland. About 53% of US and Canadian institutions are looking to increase their exposure to real assets on a net basis, after accounting for those looking to reduce their exposure. Institutions also favor real estate allocations, with 47% globally planning to increase their exposure. And 29% of US and Canadian institutions favor this investment, after accounting for reductions in real estate allocations by some. Private equity is another sought-after investment avenue, with 48% globally and about a third in the US and Canada, on a net basis, looking to gain more exposure to this investment category.
Institutional investors are also looking at private credit as a fixed income investment that offers the prospect of higher returns, with 61% of the respondents looking to take on more such exposure. They also favor US bank loans, high-yield, emerging market debt, and securitized debt for higher allocations in non-core credit areas. US and Canadian investors expect their exposure to fixed income allocations to remain flat.
Hedge fund investments are becoming less sought after, with 22% more corporate pension funds globally, led by US and UK funds, looking to cut down their exposure, after accounting for those inclined to increase their allocations to hedge funds. The investors are moving more towards bonds of long duration. Worldwide, only 28% of investors favor active equity strategies over passive strategies. Corporate pension plans lead the drive for US and Canadian institutional investors to reduce their equities holdings, with 34% of institutional investors on a net basis expecting to reduce their exposure.
And in a PIMCO asset allocation outlook report for 2017, Mihir P. Worah, PIMCO’s CIO asset allocation and real return and a managing director, and Geraldine Sundstrom, PIMCO’s portfolio manager, asset allocation, expect overall that the environment for 2017 will likely provide active managers many opportunities to make a mark by adding value.
They state, “We face a future where position on the business cycle, trends in earnings growth, as well as fiscal, tax, and trade policies could favor certain regions, industries and sectors over others. This should lead to – and has already – greater dispersion and less predictable correlations, making passive investing risky, and bottom-up analysis just as important as top-down macro.”
BlackRock conducted this survey in November and December 2016, after the election of Donald Trump as US president. The 240 institutions surveyed account for more than $8 trillion in assets.