- Institutions will move out of cash: one-third intend to reduce their cash holdings in 2014
- A portfolio diversification offered by equities and bonds might be less powerful than in the past
- That means a growing role for hedge funds and private equity
Major institutional investors around the world are poised to increase their allocations to alternative investments, with a bias towards real estate and real assets, during 2014, according to a global survey of institutions conducted by BlackRock and with approximately 100 institutional investors surveyed, representing the firm’s Americas, EMEA and Asia-Pacific markets, including corporate and private pension funds, insurers, investment managers, and government entities. In total, the investors surveyed represent more than $6 trillion in assets under management, with an average AUM of $70 billion.
Approximately half of institutions surveyed– 49% – expect to increase their real estate allocation and over 40% indicated they will increase their investment in real assets this year. At the same time, about one-third of the institutional investors surveyed intend to reduce their cash holdings in 2014.
“Institutional investors are seeking to build portfolios better suited for an investment landscape characterized by low yields, sluggish growth, volatile markets, and rising correlation between stocks and bonds,” said Robert Goldstein, Senior Managing Director and head of BlackRock’s Institutional Client Business and BlackRock Solutions.
“Divergent economic and geopolitical conditions globally offer institutions a menu of real estate and real asset opportunities that meet a variety of investment objectives,” said Goldstein. “In real estate, while core, income producing investments in developed markets are still in favor because of their liquidity and safe cash flows, we anticipate that institutions looking for income-producing alternatives will turn their attention to more opportunistic real estate investments outside their home markets,” said Goldstein.
“We’re also seeing a growing interest in infrastructure debt. These types of investments can potentially offer institutions high fixed yields, with stable cash flows and long duration.”
Seeking Out Better “Portfolio Buffers”
“The results of the survey likely reflect a recognition that, going forward, the portfolio diversification benefit traditionally offered by equities and bonds might be less powerful than in the past,” Goldstein said. “Indeed, the price correlation between US equities and bonds, which had been negative from 2009 through mid-2013, has been positive ever since then – suggesting that institutions definitely will be looking to other asset classes for more effective ‘portfolio buffers’ in coming months.”
A Growing Interest in Hedge Funds and Private Equity
“Within the alternatives category, we believe hedge funds and private equity also will command a growing role in institutional portfolios in 2014, with investors casting a wide net for appropriate diversification tools,” said Goldstein.
Nearly 30% of institutions surveyed intend to increase their hedge fund allocations this year. In the Americas, over 40% of institutions are likely to increase their hedge fund allocation; none is planning a decrease. The trend is less true for EMEA, where 35% of institutions intend to allocate less to hedge funds and just 20% will allocate more.
Approximately one-third of institutions surveyed anticipate allocating more to private equity. Private equity is less popular with EMEA institutions and smaller investors (those with less than $20 billion in AUM), with these investors indicating they will either maintain or reduce current private equity allocations.