Global institutional investors set to increase allocations to real assets

16 October 2013   Category: News, Asia, Global, USA, Europe   By Asia Asset Management

Institutional investors are reacting to the prospect of tapering by the US Federal Reserve and higher interest rates in the US and Europe by fine tuning their investment approach and continuing to shift assets out of public markets and into alternatives, according to the AMP Capital Institutional Investor Research Report.
 
The report has found more positive economic expectations are creating greater interest in assets such as direct real estate, private equity, direct infrastructure and infrastructure debt.
 
AMP Capital Chief Executive International and Head of Global Clients Anthony Fasso said: 
“Equities and fixed income still have the lion’s share of asset allocations, with 41% of respondents’ portfolios in equities and 31% in fixed income.
 
“The survey has found, however, investors are favouring investments that offer value, potential for capital growth and predictable, consistent yields as global economies continue to improve. As such, they are allocating more to alternatives and, in particular, real assets. One appeal of real assets is their tangibility, which offers greater stability and insulation from the risk of public equity markets.
 
“Investors are expecting to reduce their fixed income holdings especially in government and investment grade corporate bonds. Many respondents to the survey said these investments hadn’t met expectations during the past year.”
 
Key findings:
 
  • Demand for real estate was particularly strong in Europe, with almost 41% of respondents seeking to increase their direct real estate investments, followed by Asia (29% and North America (17%).
  • North American institutions are the biggest investors in direct real estate, with an average allocation of more than 8%, compared with 5% for Europe and just 2% for Asia.
  • Almost 20% of all institutions surveyed are expecting to increase their allocations to direct or unlisted infrastructure during the third quarter of 2013. US allocations are expected to grow as the US government starts to tap institutional investors to assist with an upgrade to the country’s infrastructure.
  • Forty-two percent of respondents said it was likely they would invest in infrastructure debt during the next two years. Demand is strongest from institutions in Europe but is growing in Asia and North America.
  • Most respondents remain heavily exposed to public equities and debt, with 25% of their portfolios in foreign and global equities, 16% in domestic stocks, 14% in foreign/global fixed income and 17% in domestic fixed income.
  • However, almost a third of investors surveyed plan to reduce their allocations to domestic government or corporate bonds in favour of high-yield corporate bonds. Other assets likely to benefit from this reallocation include infrastructure, direct real estate and private equity.
  • Thirty-three percent of respondents believed private debt would produce the most favourable fixed income returns during the next 12 months, 29% said high yield corporate bonds while only 2% said government bonds.
“Regional hot spots include Europe where many investors plan to allocate additional assets. They see undervalued stocks and bonds, with valuations there now more attractive after the sell-off in recent years,” Mr. Fasso continued. “Sophisticated investors are also using hedge funds to both maximise equity returns and provide downside protection and Asian quant funds, in particular, are in great demand. While quant markets are well established in America and Europe, they are less so in Asia where their comparative absence has created opportunities.”