Institutional Investors Look to Strengthen Portfolios With Alternatives, Multi-Asset Approaches

Interest in ESG investing continues to grow, but many investors want proof of its alpha.

Nuveen launched its inaugural “Global Institutional Investor Study” on Wednesday during a webinar, where speakers said the pandemic is causing many institutional investors to shift the assets in their portfolios to alternatives and multi-asset solutions. They are also seeking clarity on environmental, social and governance (ESG) as an alpha driver, the speakers said.

“With simultaneous crises in global public health as well as in economies and markets worldwide, 2020 offered us an extraordinary opportunity to assess the practices and attitudes of major institutional investors in managing both portfolios and day-to-day operations,” said Michael Perry, head of Nuveen’s global client group.

At the end of last year, 79% of investors said they had made no significant changes to their portfolio in reaction to the COVID-19 pandemic. However, 52% said they will make portfolio changes this year due to the pandemic. Other reasons for adjusting their portfolio were market volatility (cited by 42%) and interest rate changes (also cited by 42%).

Fifty-eight percent of investors said they will be heavily reliant on multi-asset approaches, with 36% turning to liability-driven investing (LDI) and 35% using outcome-focused strategies.

Eighty-six percent of institutional investors currently invest in alternatives and, of this group, two-thirds plan to increase their allocations in 2021.

Of those with alternative investments, 80% own real estate, 70% private equity (PE) and 63% infrastructure. Fifty-five percent of alternatives investors plan to move from public to private markets in the next 12 months.

“In a low-return environment, the shift to private asset classes and other alternatives has accelerated as more and more investors search for sources of alpha that are ‘idiosyncratic’—that is, not strongly correlated with other kinds of assets,” Perry said. “Rather than tapping private markets opportunistically and tactically to boost returns, investors are making private investments a more strategic and critical part of their investment approach.”

As to why they choose ESG investments, 34% say it is due to “organizational values and sense of social responsibility.” However, 39% say ESG factors are valid drivers of alpha, and 36% agree that ESG factors are on par with other investment factors when evaluating risk/return profiles.

“Interest in ESG investing is strong and building, and the survey suggests that investors would integrate these strategies even more extensively if they had more information about how they perform,” said Amy O’Brien, global head of responsible investing at Nuveen. “More and more, market research is helping make the case that ‘responsible investing’ can deliver competitive returns, but, clearly, there is a need to put more effort into validating the investment proposition along with the positive impact.”

Nuveen’s survey was conducted with CoreData among 700 global investors in October and November. It was supplemented with 16 interviews.