Institutions are worried the economic cycle is turning and are taking actions to protect themselves, according to BlackRock’s 2019 Institutional Rebalancing Survey. The survey asked 230 global clients representing more than $7 trillion in investable assets if they plan to increase or decrease allocations in seven different asset classes. Of those, 56% stated the possibility that the economic cycle is turning was the first or second most important macro risk influencing their rebalancing and asset allocation plans, the survey noted.
The next major macro and market influencers were geopolitical instability and trade tension (35%), although this was seen more prevalent in EMEA (Europe, Middle East and Africa) institutions (46%) and Asia Pacific institutions (40%). Another concern was rising U.S. interest rates (35%), but mainly in the United States and Canada (52%).
A prolonged equity selloff was another major macro influencer, according to 35% of those surveyed. In fact, 51% planned to decrease their exposure. This “shift is accelerating,” according to BlackRock, up from 35% in 2018 and 29% in 2017. The United States and Canada were the most aggressive, with 68% of clients planning to reduce equity allocations, versus 27% in Continental Europe.
Fixed income will continue to see a shift to private credit, with 56% of those surveyed stating they plan to increase their allocation. Thirty percent stated a focus on short-duration products.
Many institutions planned to increase their exposure to real assets (54%), private equity (47%) and real estate (40%). The study notes that “this continues a multiyear structural trend of clients reallocating risk in search of uncorrelated sources of return.”
In fact, alternatives are the new black, with real assets the biggest gainer overall with a 50% net change by institutions, followed by private equity at 37%. Equities were the biggest loser with a -37% net change, followed by hedge funds with a -2% net change.
Institutions also are shifting their focus, according to the study. In fact, 41% stated reducing public market risk within the equity portfolio was one of the top two priorities, while 32% planned to increase allocations to alpha-seeking strategies. Also, following a trend, 27% stated they plan to increase emphasis on ESG and impact investing. Only 14% saw factor investing as a focus.
Corporate pensions, which made up 33% of respondents, largely planned to de-risk as 60% intended to decrease equity allocations while 48% planned to increase fixed income. Further, the corporate pensions planned to increase illiquid assets, largely in real assets (47%), real estate (35%) and private equity (36%). Likewise, 66% of insurers, which made up 20% of respondents, planned to increase real assets.