Institutional investors are increasingly turning to alternative and illiquid asset classes as they reduce their return expectations in equities globally, according to the recent AMP Capital Institutional Investor Report, surveying a range of institutional investors globally, who collectively manage $2.4 trillion.
Of the respondents, 45 percent said they expect to increase their holdings in private equity during the first half of 2014, with 36 percent and 24 percent expecting to have increased their exposure to direct real estate and infrastructure respectively.
In particular, investors in Europe and the Middle East are most likely to target greater exposure to private equity (56 percent), with 44 North American LPs also expecting an increase.
However, 44 percent of Asia Pacific-based investors expect the biggest increase in their global listed equities portfolios, with respondents in Asia Pacific also having the highest baseline and optimistic forecast for global equities returns in 2014 at 8.1 percent and 12.1 per cent, respectively.
“Institutional investors enjoyed a stellar year in 2013 largely due to the bull market in equities around the world. Of those we surveyed, 93 percent either met or exceeded their expectations. Allocations to domestic and international equities served investors well, with developed market equities performing better than those in emerging markets,” AMP Capital chief executive and head of global clients, Anthony Fasso, said in a statement.
“However, investors’ planned allocation increases for the rest of 2014 are most pronounced in alternative assets, especially in private equity and direct real estate and infrastructure.”
Nevertheless, the report shows that many LPs are still constrained in terms of their permitted allocation to private equity or illiquid assets. Some pension schemes, in particular those preparing to enter their drawdown phase, are nearing their governance limits for investing in illiquid assets.
Two-thirds of investors surveyed have an average limit of 25 percent on the proportion of illiquid assets they can hold, with many already citing a current average allocation of 24 percent.
Moreover, institutional investors are wary of macroeconomic turmoil, especially in emerging markets.
“Looking ahead, investors have uncertain expectations. Their concerns are based around the risks they see to the global economy including the ongoing crisis in Ukraine, the end of quantitative easing by central banks and questions over the future direction of China’s economy. Despite this, the majority of investors surveyed expect to make no substantive change in their approach to seeking returns either through alpha strategies or by bearing more risk,” Fasso added.