EQuilibrium — Nuveen’s new annual global research — revealed the drivers of investor behavior and their impact on people, portfolios and problem-solving. This research paper considers the implications and applications of the study’s findings and discusses what they mean for today’s decision-makers.
About the Survey
Nuveen and CoreData surveyed 700 global investors and consultants spanning North America (NORAM); Europe, Middle East and Africa (EMEA); and Asia Pacific (APAC) in October and November 2020. Respondents were decisionmakers at corporate pensions, public/governmental pensions, insurance companies, endowments and foundations, superannuation funds, sovereign wealth funds, central banks and consulting firms.
Strengthening investment decisionmaking through meaningful diversity. Despite all of the increased awareness about diversity and inclusion (D&I), less than half of respondents said that their organizations plan to enhance their D&I practices in the coming year. Part of the disconnect may be because investors do not know where to start. We look at ways that investors, as owners of capital, can play a leading role in driving true progress when it comes to D&I, including making tangible commitments to D&I measures, articulating D&I measures in manager searches and requiring meaningful, multilevel disclosure.
Reshaping due diligence activities in a virtual/in-person working environment. Effectively leveraging both virtual and in-person due diligence meetings requires understanding when being physically present is essential and when all of the necessary information gathering and engagement can happen virtually. We explore ways to strengthen manager due diligence and increase engagement between institutions and their managers in all forms, including tailoring meeting practices to relationship lifecycles and adapting to the nuances of each asset class.
Using all available levers to hit hurdles in a low-rate environment. In a world of ultra-low interest rates and muted return expectations, the challenge of hitting return targets and meeting obligations is daunting. That is why investors need to deploy all the levers of portfolio construction that are available to them, including expanding searches for diversified sources of income and return, maximizing the efficiency of risk budgets, harnessing the illiquidity premium with precision and taking a risk-based approach to rebalancing.
Applying multidimensional inflation management. As inflation concerns mount, many institutions are counting on real estate, natural resources, farmland and infrastructure to play an important role in managing for inflation. Properly capitalizing on the inflation-management potential of these distinct asset classes, while also benefiting from their ability to add diversification, requires viewing them through a risk-factor lens and identifying which aspects of inflation investors are trying to address.
Building stronger portfolios with infrastructure. It is not surprising that the highest percentage of investors identified infrastructure as the alternative asset class to which they plan on increasing allocations in 2021. Infrastructure’s potential to hedge against inflation and provide diversified income streams, as well as its alignment with secular mega-themes, makes it a highly attractive addition to a portfolio. Opportunities within infrastructure have expanded significantly in the past decade, which means that selectivity is paramount
Harnessing the power of private markets through a factors-first approach to portfolio construction. Investors’ strategic shift toward private markets highlights the need to construct portfolios that efficiently harness the idiosyncratic value of alternatives. This requires understanding what specific risk-factor exposures each sub-asset class brings to a portfolio and determining which risk factors investors want to own based on how the market is currently rewarding those risks and the investor’s unique objectives and constraints. Only then should investors begin to consider the most efficient way to own those risks.
Rethinking complexity as a barrier—and an opportunity—in alternatives. Investors cited complexity of deals as the No. 1 barrier to investing in alternatives. That complexity is also a core driver of the opportunity in nontraditional asset classes. As a result, investors need to overcome the complexity-related challenges associated with alternatives. These include educating boards, investment committees and other shareholders about the investment thesis and risk profile of a specific strategy, as well as overcoming some investors’ lack of internal team expertise in alternatives.
Was 2020 an inflection point in ESG reporting? Decisions about materiality and reporting are central to all of the multifaceted objectives driving environmental, social and governance (ESG) integration efforts—and the lack of uniform standards is the biggest barrier to the ESG dream state, according to respondents. Fortunately, 2020 saw several major initiatives by reporting organizations and regulatory bodies to create more uniform, cohesive ESG reporting standards. These efforts, along with investors’ efforts to move toward more dynamic measures of materiality and establish portfoliowide sustainability goals, point to significant progress toward investors’ dream state for ESG integration.
Finding common ground on ESG integration. Investors can foster more effective ESG communications with and reporting from their managers by clearly articulating the multi-stakeholder view underlying investors’ ESG integration efforts. Understanding that asset owners and managers may be coming at ESG from different perspectives is vital to bridging the gap and driving toward the type of product offerings, portfolio integration and reporting that is vital to the ESG dream state.
Leveraging the power of ESG in private markets. The most commonly cited planned action by investors over the next 12 months is to seek out more ESG-oriented alternatives. Sustainable management of private assets, and real assets in particular, will play a leading role in achieving goals such as net-zero carbon emissions by 2050. That is why it is so important for investors to seek managers that are committed to applying the best practices in ESG integration and reporting across all asset classes.
Understanding the types of alternative investors and ESG investors. By exploring investors’ beliefs, approaches and planned actions, we identified four distinct types of alternative investors and four types of ESG investors. Understanding how investors form their beliefs and translate them into action in both realms can foster a more strategic approach to multi-asset portfolio construction and more effective ESG integration.
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This material is presented for informational purposes only and may change in response to changing economic and market conditions. This material is not intended to be a recommendation or investment advice, does not constitute a solicitation to buy or sell securities, and is not provided in a fiduciary capacity. The information provided does not take into account the specific objectives or circumstances of any particular investor, or suggest any specific course of action. Financial professionals should independently evaluate the risks associated with products or services and exercise independent judgment with respect to their clients. Certain products and services may not be available to all entities or persons. Past performance is not indicative of future results.
Economic and market forecasts are subject to uncertainty and may change based on varying market conditions, political and economic developments. As an asset class, real assets are less developed, more illiquid, and less transparent compared to traditional asset classes. Investments will be subject to risks generally associated with the ownership of real estate-related assets and foreign investing, including changes in economic conditions, currency values, environmental risks, the cost of and ability to obtain insurance, and risks related to leasing of properties.
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