Schroders Institutional Investor Study

Investors embrace private assets as geopolitical concerns and global economic slowdown fears soar

30/10/2019
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Geopolitical concerns and fears of a global economic slowdown have soared as investors increasingly embrace private assets, Schroders Institutional Investor Study 20191 has found.

The study - which surveyed 650 institutional investors encompassing approximately $25.4 trillion in assets – has identified a growing apprehension among investors amid a backdrop of increasing macroeconomic uncertainty.

More than half of investors (52%) said that politics and world events such as Brexit and trade wars would impact portfolio performance over the next 12 months. This is a marked increase on 32% of investors in 2017 and 44% in 2018.

Over a third of investors (37%) also cited a global economic slowdown as the biggest concern, significantly up on 27% a year ago. These findings are perhaps reflective of the continued trade dispute between China and the US, as well as the growing uncertainty ahead of the Brexit deadline.

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Q. What influences worry you the most?

Higher interest rates were cited as the biggest influence on portfolio performance, although this was to a lesser extent than a year ago. In contrast, factors previously thought to be very influential – such as monetary policy tapering, regulation and the risk of cyber-attacks – have all steadily decreased in importance over the past 12 months.

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In terms of asset classes, appetite for emerging markets (EMs) has fallen among institutional investors, with allocations dropping from 15% in 2017 to 10% this year. Expected allocations towards EMs over the next 12 months have also slipped to 9%.

Just a third of investors (29%) are holding their investments for 3-5 years, with only 10% remaining invested for a full cycle. This comes as more than half (53%) of investors stated there is a greater need for customised or bespoke products because off-the-shelf funds are failing to meet their organisation’s financial objectives.

Focus on private assets

Driving investors’ returns expectations is their continuing focus on private assets. More than half (52%) expect to raise their allocations to private assets over the next three years. Investors in North America (58%) and Asia (50%) were the most intent on doing so.

Investors globally cited the need to generate higher returns and portfolio diversification as the two biggest factors encouraging them to invest in private assets.

Across the private asset spectrum, private equity was viewed as the source of greatest potential returns, with 69% of investors anticipating returns of over 5%. Further supporting this view, out of the main private assets classes, 37% of investors globally are intending to increase their allocations to private equity, markedly ahead of private debt, infrastructure equity and real estate.

Investors, however, cited the cost and complexity of fees as the greatest challenge to investing in private assets, and also flagged high valuations as the primary concern when investing in the asset class.

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Q. How concerned are you, or would you be, about the following when investing in private assets?

Overall return expectations

Despite these macroeconomic pressures, investors’ return expectations have, however, remained steady over the past 12 months. The majority of investors globally (57%) are factoring in annual returns of 5%-9% annualised over the next five years. This compares to 60% of investors a year ago.

Geographically, the gap between a bullish North America and more cautious investors in Europe has significantly widened.

Over three-quarters (77%) of North American investors are estimating returns of 5%-9%, a marked difference to 42% of investors in Europe.

Andreas Markwalder, CEO Schroder Investment Management (Switzerland) AG, commented:

"In view of the geopolitical uncertainties, concerns among institutional investors are understandable. Nevertheless, it is encouraging to see that despite these challenges investors' return expectations - with the exception of those in Europe - remain relatively robust and their holdings periods are also stable. Particularly in challenging times, investments should not be reshifted, as this could have a negative impact on portfolio returns. As standard funds are failing to meet their financial targets in this challenging environment, the need for tailormade products is increasing".

Georg Wunderlin, Global Head of Private Assets, Schroders, commented:

“Institutional investors are increasingly aware that they can afford a higher share of illiquid assets in their portfolios, given their long-duration liabilities. They are therefore looking to capture the illiquidity premium while adding diversification to their portfolios.

“In the current market environment investors are particularly interested in strategies based on ‘deep operational skills’ where performance can effectively be ‘manufactured’ by the responsible investment teams. Examples are small and midcap buyouts in private equity or differentiated value-add strategies in real estate. In these areas investment performance is considerably less influenced by market cycles.”

1 This global study was commissioned by Schroders for the third consecutive year to analyse institutional investors and their attitudes towards investment objectives, risks, private assets and sustainable investments. The respondent pool represents a spectrum of institutions, including pension funds, insurance companies, sovereign wealth funds, endowments and foundations managing approximately $25.4 trillion in assets. The research was carried out via an extensive global survey during May 2019. The 650 institutional respondents were split as follows: 175 in North America, 250 in Europe, 175 in Asia and 50 in Latin America. Respondents were sourced from 20 different locations across the world.

For more detailed information on the study, please click here.

For further information, please contact:

Schroders

Alice West, Senior Corporate Communications Manager

Tel: +41 (0)44 250 12 26 / alice.west@schroders.com

Note to Editors

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