Despite enjoying better-than-expected returns in 2013, institutional investors are significantly reining in their return expectations for 2014 and turning to alternative – and illiquid – asset classes alongside global equities, according to the latest AMP Capital Institutional Investor Report.
The survey of global institutional investors, who manage a collective US$2.4 trillion, found respondents’ portfolios returned on average 13 per cent in 2013.
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However, respondents see key risks to the global economy as stumbling blocks in achieving their investment returns for the year ahead. For the remainder of 2014, respondents expect to achieve average returns of 7.3 per cent.
Globally, respondents in Asia Pacific have the highest baseline and optimistic forecast for 2014 at 8.1 per cent and 12.1 per cent, respectively. Respondents from Europe and the Middle East have consistently lower forecasts on average than those of investors in Asia Pacific and also The Americas.
AMP Capital Chief Executive International and Head of Global Clients Anthony Fasso said: "Institutional investors enjoyed a stellar year in 2013 largely due to the bull market in equities around the world. Of those we surveyed, 93 per cent 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. 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. This is a continuation of the trend that we have highlighted in earlier issues of our Institutional Investor Report series.
"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."
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By GlobalDataKey findings from the survey include:
– Forty-five per cent of respondents expected to boost their holdings in private equity during the first half of 2014, more than a third (36 per cent) anticipate an increase in their allocation to direct real estate and almost a quarter (24 per cent) plan to boost their investment in direct infrastructure.
– Investors from Europe and the Middle East are most likely to increase their investment in direct real estate (59 per cent) and private equity investment (56 per cent). In the Americas, private equity (44 per cent) and direct real estate (22 per cent) allocations are expected to rise the most in respondents’ portfolios. Asia-Pacific investors expect to see the greatest rise in allocations to global equities (44 per cent).
– While institutional investors are continuing to increase allocations to alternative assets, the rise may be tempered as pension schemes, in particular, that are preparing to enter their drawdown phase may soon find themselves up against their governance limits for investing in illiquid assets. Two-thirds of investors have an average limit of 25 per cent on the proportion of illiquid assets they can hold and many already have an average allocation of 24 per cent.
– Thirty-one per cent of investors intend to move out of domestic equities, 26 per cent are decreasing their allocation to cash and 21 per cent said they would reduce the domestic fixed income portion of their portfolio.
– In Asia Pacific and in Europe and the Middle East, 29 per cent and 31 per cent of respondents, respectively, plan to decrease their holdings in domestic fixed income. In the Americas, 29 per cent of respondents primarily plan to decrease their allocations to domestic equities.
– Investors in the Americas have the greatest exposure to equities (on average 53 per cent), followed by Asia Pacific (46 per cent) then Europe and the Middle East (37 per cent).
– Average allocation to fixed income is highest in Europe and the Middle East (37 per cent) compared to Asia Pacific (21 per cent) and the Americas (20 per cent).
– Survey respondents have limited interest in considering environmental, social, and governance factors when making investment decisions despite evidence they add some value.
