Investors Raising Allocation To Private Markets

Investors Raising Allocation To Private Markets

Amid rising concerns of a turn in economic cycle, institutional investors are looking to mitigate risks by increasing allocations to private markets.

Amid concerns of a turn in economic cycle, fund managers are continuing a multi-year trend in search of uncorrelated returns. private markets will be particularly popular in 2019, according to BlackRock's annual survey of 230 institutional clients globally, representing over $7 trillion in assets.

«We have been emphasising the potential of alternatives to boost returns and improve diversification for some time, so we’re not surprised to see clients increasing allocations to illiquid assets, including private credit,» said Edwin Conway, global head of BlackRock’s institutional client business.

This means that illiquid alternatives are set to see further inflows, with 54 percent of surveyed participants intending to increase exposure to real assets, 47 percent to private equity, and 40 percent to real estate, according to the survey.

Cycle Turn an Important Influencer

Globally, over half of surveyed clients stated that the possibility of the cycle turning is one of the most important macro risks influencing their rebalancing and asset allocation plans, including 60 percent of respondents from the Asia Pacific (APAC) region. 

Over half intend to decrease their allocation to public equities this year. This trend is most pronounced in the U.S. and Canada, where over two thirds (68 percent) plan to reduce equity allocations, followed by APAC (40 percent).

«As the economic cycle turns, we believe that private markets can help clients navigate this more challenging environment,»  said Conway.

Spike in Fixed Income Allocation, Maintain Cash

In contrast, intended fixed income allocations have seen a spike. Last year, 29 percent were planning to increase allocations but this year, 38 percent plans to do so. 

The survey also finds that the majority of institutions want to maintain or even increase their cash levels in 2019, especially in the Asia Pacific region, where a third (33 percent) plan to increase their cash holdings to protect their portfolios.

«The move into fixed income is especially pronounced for corporate pensions, as many defined benefit plans are focused on de-risking, locking in improvements to funded status, and preparing for an end-game», Conway noted.

(Source: BlackRock)

Shifting Priorities within Equities Allocations

While the global trend is to reduce equity exposures over the short term, institutions are shifting their focus and priorities within equity portfolios. The three most prominent considerations are: (1) reduce public market risk within their portfolios (cited by 41 percent), (2) increasing allocations to alpha-seeking strategies (cited by one-third), and (3) focus more on Environmental, Social and Governance (ESG) strategies and impact investing.

Among APAC respondents, reducing public market risk (47 percent) and increasing allocations to alpha-seeking strategies (33 percent) are the top two considerations for equity portfolios, while increasing diversification and reducing home market bias (27 percent) came in third.