In a survey BlackRock conducted in November and December, 25% of institutional investors globally said they would decrease cash allocations this year, about twice as many as planned to increase their cash holdings.

Real assets, including infrastructure, commodities, timber, farmland and the like, will be the big beneficiaries of institutional asset flows in 2017, the poll found.

BlackRock said that over the last three years, its survey has shown that institutional clients are increasingly shifting into less liquid assets, a trend that has continued this year.

“The recent equities rally has been more than offset by years of low rates and many institutions are still suffering from underfunding,” Edwin Conway, the firm’s global head of the institutional client business, said in a statement.

Conway said investors had been challenged by global equities’ underperformance and negative fixed income returns in the past year. He said reflation is set to take root this year and could be the catalyst 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,” he said.

Survey participants, 240 of BlackRock’s biggest institutional investors, represented $8 trillion in assets.

Allocation Trends

Fifty-eight percent of investors surveyed said they expected to raise their allocations to real assets in 2017, compared with 49% who said this in last year’s poll.

Investors across all regions were found to plan increases to real assets in 2017:

  • Continental Europe, 69%, and the U.K., 63%
  • Asia/Pacific, 63%
  • U.S. and Canada, 53%
  • Latin America, 36%

Real estate also is likely to see significant interest, with 38% of investors globally looking to increase allocations to the asset class. The most significant increases are expected in Asia/Pacific and Continental Europe.

The outlook for private equity flows is also positive, with 35% across all regions planning to increase their holdings.

“Institutional investors are recognizing that they need to do something different to get the investment outcomes they want,” Conway said. “They are increasingly seeking alternative income, and are embracing less liquid strategies to enhance returns.”

Hedge funds will not be among the beneficiaries of asset flows this year, the survey found.

Corporate pensions globally, but especially in the U.S. and the U.K., are decreasing hedge fund allocations and moving toward long-duration bonds. Insurers, too, are reducing these allocations and looking to real assets and real estate.

Only Latin American investors are proving to be hedge fund stalwarts. The survey found a global trend within fixed income of a move away from core assets toward strategies with the potential to yield higher returns.

Private credit is the frontrunner across all regions and investor types, with 58% of institutions expecting to increase holdings.

Credit strategies more broadly will also benefit from a rebalancing of assets away from core. Twenty-six percent of investors said they would increase allocations to U.S. bank loans, 23% to high yield, 22% to securitized assets and 19% to emerging market debt.

Significant regional variations in fixed income allocations exist. The survey found that institutional investors in Asia/Pacific and the U.S. and Canada expected their allocations to remain broadly flat, while those in Continental Europe expected theirs to decrease.

Globally, 28% of investors said they intended to increase their allocations to active equities relative to passive equities, with 55% planning to keep their current mix of active and passive strategies constant.

Seventeen percent of investors said they would increase their allocation to passive strategies.

North America was the only region in which institutional investors overall expected to reduce their equity holdings, largely driven by corporate pension plans.

In contrast, 36% of Latin American institutional investors expected to increase their equity allocations, as did 21% of those in Asia/Pacific and 18% in Continental Europe.

Following are the BlackRock survey’s rebalancing data on a net percentage basis (net of increases versus decreases):

  • Real assets, 58% net
  • Real estate, 38% net
  • Private equity, 35% net
  • Cash, -12% net
  • Hedge funds, -11% net
  • Fixed income, -6% net
  • Equities, -6% net

— Check out Sustainable and Impact Investing in U.S. Surges by 33%: Report on ThinkAdvisor.