Big Institutional Investors Looking for ‘Portfolio Buffers’

BlackRock survey finds preference for real estate and real assets

As correlation betweed stocks and bonds increases, major institutional investors around the world are looking to alternative investments to "buffer" their portfolios, according to a survey released last week by BlackRock. They're showing a preference for real estate and real assets.

Forty-nine percent of institutions surveyed said they expected to increase their real estate allocation this year, and more than 40% said they would increase their investment in real assets.

At the same time, about one-third of respondents intended to reduce their cash holdings in 2014.

BlackRock surveyed some 100 institutional investors in the Americas, Europe-Middle East-Africa and Asia-Pacific markets, including corporate and private pension funds, insurers, investment managers and government entities. These investors represent a total of more than $6 trillion in assets under management, with an average AUM of $70 billion.

“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,” Robert Goldstein, head of BlackRock’s institutional client business and BlackRock Solutions, said in a statement.

“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.”

Goldstein also noted growing interest in infrastructure debt, which can potentially offer institutions high fixed yields, with stable cash flows and long duration.

Within the alternatives category, nearly 30% of institutions surveyed intended to increase their hedge allocations this year. In the Americas, more than 40% of institutions were likely to do so, and none were planning a decrease.

The trend was less true for EMEA, where 35% of institutions intended to allocate less to hedge funds, and just 20% planned to allocate more.

Approximately a third of institutions surveyed anticipated increasing allocations to private equity.

Private equity is less popular with EMEA institutions and smaller investors with less than $20 billion in AUM, according to BlackRock. These investors said they would either maintain or reduce current private equity allocations.

“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 U.S. 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.”

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