Institutional investors surveyed for Boston-based FMR LLC’s Fidelity Global Institutional Investor Survey expect to make more asset-allocation changes in the next one to two years than they did in 2012 and 2014, which will see many making the shift toward alternative investments, domestic fixed-income and cash.
Less than three-quarters (72%) of institutional investors surveyed say they will increase their allocation of illiquid alternatives in 2017 and 2018 and 42% say this will be the case for liquid alternatives. Almost two-thirds (64%) of survey participants will dedicate more portfolio room to domestic fixed-income and 55% will increase their holdings in cash, states the research by FMR, more commonly known as Fidelity Investments.
However, the U.S. is an outlier in this scenario as many institutional investors in that country appear to be taking a “wait and see” approach to their strategy. For example, the percentage of U.S.-based institutional investors who plan on moving away from domestic equities in 2017 is 28% compared with the 51% who said they would do so in 2012. And there has only been a slight increase of investors, to 11%, who said they would increase their allocation to domestic equity in 2017 compared with 8% in 2012.
“With 2017 just around the corner, the asset-allocation outlook for global institutional investors appears to be driven largely by the local economic realities and political uncertainties in which they’re operating,” says Scott Couto, president of Fidelity Institutional Asset Management, in a statement.
“The U.S. is likely to see its first [interest] rate hike in 12 months, which helps to explain why many in the country are hitting the pause button when it comes to changing their asset allocation,” he adds.
When global institutional investors were asked about their primary concerns, the most frequently cited responses were a low-return environment for 28% of survey participants and market volatility for 27%.
Investment concerns are found to vary depending on the type of institution to which an investor belongs. Sovereign wealth funds, public sector pensions, insurance companies as well as endowments and foundations are most worried about market volatility while private sector pension plans cite a low-return environment as their top concern.
These two concerns are a result of evolving geopolitical and market environments, according to Derek Young, vice chairman of Fidelity Institutional Asset Management and president of Fidelity’s global asset allocation division.
“Expectations that strengthening economies would build enough momentum to support higher interest rates and diminished volatility have not borne out, particularly in emerging Asia and Europe,” he explains in a statement.
Even though institutional investors express certain concerns about the investing environment, 96% are confident they can still generate alpha over their benchmarks to meet their growth objectives. More than half (56%) of all survey participants say growth, which includes capital and funded status growth, remains their primary investment objective.
A majority of institutional investors believe they enjoy a competitive advantage because of confidence in their staff or access to better managers, says Young: “More importantly, these institutional investors understand that taking on more risk, including moving away from public markets, is just one of many ways that can help them achieve their return objectives.”