Institutional Investors Put Cash to Work in 2017 – BlackRock Study

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Large institutional investors are set to put cash to work in 2017, a BlackRock survey has found. One in four (25%) institutions surveyed intend to decrease their cash allocations during the year, twice as many as those who plan to increase their cash holdings (13%). The survey shows a clear trend that this cash will be deployed in 2017, with institutional investors anticipating making significant shifts to less liquid assets. Investors are also looking to allocate to higher yielding areas, and are increasingly considering non-traditional asset classes.

The survey of 240 institutional clients globally, representing over US$8 trillion in assets, explores how these investors plan to rebalance assets in 2017, and was one of the first polls of institutional investor sentiment following the election of Donald Trump as U.S. President in November 2016. Over the last three years, the survey has highlighted 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. In the past year, investors have been challenged by global equities underperformance and negative fixed income returns. On top of this added pressure to deliver returns, reflation is set to take root this year and could well be the final prompt that 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,” commented Edwin Conway, Global Head of the Institutional Client Business at BlackRock.

Less liquid assets favoured

Real assets[i] are anticipated to be the largest beneficiaries of institutional asset flows in 2017, with 61% of those surveyed expecting to increase their allocations here. Only 3% of investors plan to decrease allocations. On a net basis, taking into account increases minus decreases, 58% of institutional investors globally will be increasing allocations to real assets. This compares to 49% (net) who expected to increase their allocations in 2016. 

Investors across all regions are planning increases to real assets in 2017, with the most significant increases expected from Continental Europe (69% net) and the UK (63% net) where approximately two thirds of investors expect to up their allocations. This is closely followed by Asia Pacific (APAC) with 63% net. Over half of institutional investors in the US & Canada (+53% net) and over a third of those in Latin America (36% net) expect to increase exposure to real assets.

Real estate is also set to see significant interest, with 47% of investors globally looking to increase allocations to the asset class, and only 9% looking to decrease allocations (+38% net). The most significant increases are expected to be seen in APAC (+61% net), followed by Continental Europe (+56% net). Over two fifths (+42% net) of Europe, Middle East and Africa (EMEA) investors will increase their real estate holdings, closely followed by Latin America (+39% net) and the US & Canada (+29% net).

The outlook for private equity flows is also looking positive, with almost half of global investors (48%) planning to increase their holdings, and only 13% looking to reduce allocations (35% net). This trend is apparent across all regions. Over half of investors in APAC expect to make increases to private equity (+52% net), followed by Latin America (+47% net) and Continental Europe (+44% net). Around a third of investors across EMEA and in the US & Canada will look to increase their private equity holdings (+33% and +32% net respectively).

Edwin Conway added: “Institutional investors are recognising that they need to do something different to get the investment outcomes they want. With market volatility and lower returns expected from traditional asset classes for the near future, investors are having to look elsewhere for yield. They are increasingly seeking alternative income, and are embracing less liquid strategies to enhance returns. Many alternative asset classes, such as long lease property, infrastructure and renewables, are able to provide inflation protection, along with secure income streams, to take care of investors’ need for cash flows.” 

Credit exposure increasing

Within fixed income, there is a clear global trend showing a move away from core assets and towards strategies with the potential to yield higher returns. Private credit is the clear frontrunner for fixed income, across all regions and investor types, as the area where institutions expect to increase holdings (61%), with only 4% looking to decrease slightly (58% net).

Credit strategies more broadly are set to benefit from a rebalancing of assets away from core and core plus (-10% net). US bank loans are expected to see an increase in allocations from investors (26% net), followed by high yield (23% net), securitized assets (22% net) and emerging market debt (19% net).

Looking at fixed income allocations as a whole, there are some significant variations by region. While institutional investors in APAC and the US & Canada expect their allocations to remain broadly flat, those in Europe expect theirs to decrease. This is driven mainly by investors in Continental Europe where 43% (net) expect to reduce their fixed income exposures.

Allocations to hedge funds on the decrease 

Globally, corporate pensions are decreasing their allocations to hedge funds (-22% net), especially in the UK and the US, and moving towards long duration bonds, likely pointing to de-risking trends. Insurers are also following suit, with a decrease of 12% in allocations to hedge funds globally, and increased favorability towards real assets and real estate. Latin America proves to be the only exception on a regional basis, with moves expected into private equity (+47%), real assets (+36%), real estate (+39%) and hedge funds (+31%).

Active and passive equity allocations

Globally, one in four institutional investors (28%) intend to increase their allocations to active equities relative to passive equities, with over half (55%) planning to keep their current mix of active and passive strategies constant. 17% intend to increase their allocation to passive strategies.

In terms of equity allocations overall, the shifts differ substantially by region and client type. The US & Canada is the only region in which institutional investors overall expect to reduce their equity holdings (-34% net), largely driven by corporate pension plans. In contrast, over a third of institutional investors in Latin America expect to increase their equity allocations (+36% net). Around two fifths of investors in APAC (+21% net) and Continental Europe (+18% net) anticipate making increases. Across EMEA a marginal 2% (net) of investors will increase their equity holdings.

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About the survey

In November and December 2016, BlackRock conducted a global survey of 240 of its largest institutional clients, including public pensions (23%), corporate pensions (33%), official institutions (4%), insurers (25%), investment managers (7%), endowments and foundations (4%), and others (4%). In terms of geographic distribution, 39% of the respondents were located in North America, 38% in Europe, the Middle East and Africa, 13% in Asia-Pacific, and 10% in Latin America. 

Rebalancing survey data 

In 2017, how do you anticipate changing your allocations to the following? 

% increase

% unchanged

% decrease

% net (figure net of increases versus decreases)

Equities

23%

48%

29%

-6%

Fixed Income

28%

39%

34%

-6%

Hedge Funds

17%

55%

28%

-11%

Private Equity

48%

40%

13%

35%

Real Estate

47%

43%

9%

38%

Real Assets

61%

35%

4%

58%

Cash

13%

62%

25%

-12%

 

 

About BlackRock 

BlackRock is one of the global leaders in investment management, risk management and advisory services for institutional and retail clients. At December 31, 2016, BlackRock’s AUM was US$5.1 trillion. BlackRock helps clients around the world meet their goals and overcome challenges with a range of products that include separate accounts, mutual funds, iShares® (exchange-traded funds), and other pooled investment vehicles. BlackRock also offers risk management, advisory and enterprise investment system services to a broad base of institutional investors through BlackRock Solutions®. As of December 31, 2016, the firm had approximately 13,000 employees in more than 30 countries and a major presence in global markets, including North and South America, Europe, Asia, Australia and the Middle East and Africa.

 

Important notes 

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[i]
Real Assets (Infrastructure; Commodities; Timber; Farmland; etc.)