Institutional investors globally expect to make more asset allocation changes in the next one or two years that they did in 2012 and 2014, most notably with alternative investments, domestic fixed income and cash, according to a new survey from Fidelity Investments.
However, institutional investors in some regions are bucking this trend. Investors in the U.S., for instance, are on a relative basis adopting a wait-and-see approach.
Worldwide, 72% of institutional investors said they would increase their allocation of illiquid alternatives in 2017 and 2018, 64% would do so for domestic fixed income, 55% for cash and 42% for liquid alternatives.
“With 2017 just around the corner, the asset allocation outlook for global institutional investors appears to be driven largely by the local economic realities and political uncertainties in which they’re operating,” Scott Couto, president of Fidelity Institutional Asset Management, said in a statement.
“The U.S. is likely to see its first rate hike in 12 months, which helps to explain why many in the country are hitting the pause button when it comes to changing their asset allocation.”
Couto noted that institutions are increasingly managing their portfolios in a more dynamic manner, that is, making more investment decisions today than they have in the past.
Moreover, expectations of lower returns and higher market volatility are driving more institutions into less commonly used assets, such as illiquid investments, he said.
“For these reasons, organizations may find value in re-examining their investment decision-making process as there may be opportunities to bring more structure and accommodate the increased number of decisions, freeing up time for other areas of portfolio management and governance.”
Fidelity surveyed 933 institutional investors in 25 countries this past summer, including 174 U.S. corporate pension plans, 77 U.S. government pension plans, 51 nonprofits and other U.S. institutions; and 101 Canadian, 20 other North American, 350 European, 150 Asian and 10 African institutions, including pensions, insurance companies and financial institutions. Respondents’ assets under management totaled some $21 trillion.
For all institutions in the survey, 28% said their top concern was a low-return environment, and 27% said it was market volatility. Worry about capital markets in this year’s survey increased from 2010, when 25% of survey respondents cited a low-return environment as a concern and 22% cited market volatility.
“As the geopolitical and market environments evolve, institutional investors are increasingly expressing concern about how market returns and volatility will impact their portfolios,” Derek Young, vice chairman of Fidelity Institutional Asset Management and president of Fidelity Global Asset Allocation, said in the statement.
“Expectations that strengthening economies would build enough momentum to support higher interest rates and diminished volatility have not borne out, particularly in emerging Asia and Europe.”
The survey found that investment concerns also varied according to institution type. Globally, 46% of sovereign wealth funds, 31% of public sector pensions, 25% of insurance companies and 22% of endowments and foundations expressed the most concern about market volatility.