The Markets February 10, 2017

Real Assets Will Win Institutional Investor Allocations in 2017

Investors are looking to allocate to higher yielding areas, and are increasingly considering non-traditional asset classes.
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Large institutional investors are set to put cash to work in 2017, a BlackRock survey found.

One in four (25%) institutions surveyed intend to decrease their cash allocations during the year, twice as many as those who plan to increase their cash holdings (13%). The survey shows a clear trend that this cash will be deployed in 2017, with institutional investors anticipating making significant shifts to less liquid assets. Investors are also looking to allocate to higher yielding areas, and are increasingly considering non-traditional asset classes.

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“The recent equities rally has been more than off-set by years of low rates, and many institutions are still suffering from underfunding.” says Edwin Conway, global head of the Institutional Client Business at BlackRock. “In the past year, investors have been challenged by global equities underperformance and negative fixed income returns. On top of this added pressure to deliver returns, reflation is set to take root this year and could well be the final prompt that institutions have needed to rethink their cash allocations and views on risk. 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.”

Real assets are anticipated to be the largest beneficiaries of institutional asset flows in 2017, with 61% of those surveyed expecting to increase their allocations here. Only 3% of investors plan to decrease allocations. On a net basis, taking into account increases minus decreases, 58% of institutional investors globally will be increasing allocations to real assets. This compares to 49% (net) who expected to increase their allocations in 2016. More than half of institutional investors in the U.S. and Canada (53% net) expect to increase exposure to real assets.

Real estate is also set to see significant interest, with 47% of investors globally looking to increase allocations to the asset class, and only 9% looking to decrease allocations (38% net). In the U.S. & Canada 29% (net) plan to increase real estate holdings.

The outlook for private equity flows is also looking positive, with almost half of global investors (48%) planning to increase their holdings, and only 13% looking to reduce allocations (35% net). Nearly one-third of investors in the U.S. and Canada will look to increase their private equity holdings (32% net).

Conway adds: “Institutional investors are recognizing that they need to do something different to get the investment outcomes they want. With market volatility and lower returns expected from traditional asset classes for the near future, investors are having to look elsewhere for yield. They are increasingly seeking alternative income, and are embracing less liquid strategies to enhance returns. Many alternative asset classes, such as long lease property, infrastructure and renewables, are able to provide inflation protection, along with secure income streams, to take care of investors’ need for cash flows.”

NEXT: Credit exposure, hedge funds and active and passive equity allocations

Within fixed income, there is a clear global trend showing a move away from core assets and towards strategies with the potential to yield higher returns, according to the survey. Private credit is the clear frontrunner for fixed income, across all regions and investor types, as the area where institutions expect to increase holdings (61%), with only 4% looking to decrease slightly (58% net).

Credit strategies more broadly are set to benefit from a rebalancing of assets away from core and core plus (-10% net). U.S. bank loans are expected to see an increase in allocations from investors (26% net), followed by high yield (23% net), securitized assets (22% net) and emerging market debt (19% net).

Looking at fixed income allocations as a whole, institutional investors in the U.S. and Canada expect their allocations to remain broadly flat.

Globally, corporate pensions are decreasing their allocations to hedge funds (-22% net), especially in the UK and the U.S., and moving towards long duration bonds, likely pointing to de-risking trends. Insurers are also following suit, with a decrease of 12% in allocations to hedge funds globally, and increased favorability towards real assets and real estate.

Globally, one in four investors (28%) intend to increase their allocations to active equities relative to passive equities, with more than half (55%) planning to keep their current mix of active and passive strategies constant. Seventeen percent intend to increase their allocation to passive strategies.

In terms of equity allocations overall, the shifts differ substantially by region and client type. The U.S. and Canada is the only region in which institutional investors overall expect to reduce their equity holdings (-34% net), largely driven by corporate pension plans.

In November and December 2016, BlackRock conducted a global survey of 240 of its largest institutional clients, including public pensions (23%), corporate pensions (33%), official institutions (4%), insurers (25%), investment managers (7%), endowments and foundations (4%), and others (4%). In terms of geographic distribution, 39% of the respondents were located in North America, 38% in Europe, the Middle East and Africa, 13% in Asia-Pacific, and 10% in Latin America.

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