Major institutional investors are poised to increase their allocations to alternative investments, with a bias towards real estate and real assets, during 2014, according to a survey by BlackRock.
Approximately half of institutions surveyed – 49 per cent – expect to increase their real estate allocation and over 40 per cent indicated they will increase their investment in real assets this year.
At the same time, about one-third of the institutional investors surveyed intend to reduce their cash holdings in 2014.
“Institutional investors are seeking to build portfolios better suited for an investment landscape characterised by low yields, sluggish growth, volatile markets, and rising correlation between stocks and bonds,” says Robert Goldstein, senior managing director and head of BlackRock’s institutional client business and BlackRock Solutions. “Divergent economic and geopolitical conditions globally offer institutions a menu of real estate and real asset opportunities that meet a variety of investment objectives.
“In real estate, while core, income producing investments in developed markets are still in favour because of their liquidity and safe cash flows, we anticipate that institutions looking for income-producing alternatives will turn their attention to more opportunistic real estate investments outside their home markets.
“We’re also seeing a growing interest in infrastructure debt. These types of investments can potentially offer institutions high fixed yields, with stable cash flows and long duration.
“The results of the survey likely reflect a recognition that, going forward, the portfolio diversification benefit traditionally offered by equities and bonds might be less powerful than in the past,” Goldstein says. “Indeed, the price correlation between US equities and bonds, which had been negative from 2009 through mid-2013, has been positive ever since then – suggesting that institutions definitely will be looking to other asset classes for more effective ‘portfolio buffers’ in coming months.
“Within the alternatives category, we believe hedge funds and private equity also will command a growing role in institutional portfolios in 2014, with investors casting a wide net for appropriate diversification tools.”
Nearly 30 per cent of institutions surveyed intend to increase their hedge fund allocations this year.
In the Americas, over 40 per cent of institutions are likely to increase their hedge fund allocation; none is planning a decrease. The trend is less true for EMEA, where 35 per cent of institutions intend to allocate less to hedge funds and just 20 per cent will allocate more.
Approximately one-third of institutions surveyed anticipate allocating more to private equity. Private equity is less popular with EMEA institutions and smaller investors (those with less than USD20bn in AUM), with these investors indicating they will either maintain or reduce current private equity allocations.