Private markets may become particularly popular among institutional investors this year as concerns of a downturn in the economic cycle escalate.
In a survey of 230 global institutional clients representing over US$7 trillion in assets, BlackRock has found that 51% are intending to decrease their allocation to public equities in 2019. This is a marked acceleration from the 35% of clients who planned reductions in 2018 and 29% who said they would in 2017.
Fifty-six per cent of the respondents identified the possibility of the cycle turning as one of the most important macro risks influencing their rebalancing and asset allocation plans. With that in mind, 54% said they intend to ratchet up their exposure to real assets, 47% are looking at private equity, and 40% said they will put more in real estate.
“As the economic cycle turns, we believe that private markets can help clients navigate this more challenging environment,” Edwin Conway, global head of BlackRock’s Institutional Client Business, said in a statement. “We have been emphasizing the potential of alternatives to boost returns and improve diversification for some time, so we’re not surprised to see clients increasing allocations to illiquid assets, including private credit.”
The number of participants with plans to dial up their fixed-income allocations has also spiked. From just 29% of those polled last year, the number has increased to 38%. Within the fixed-income space, there’s a continuing shift to private credit, where 56% of global respondents said they would increase their allocations. Other popular areas include short duration (30%), securitized assets (27%), and emerging markets (29%), which BlackRock infers have become attractive because of relative value opportunities.
The majority of institutions also expressed a desire to maintain (65%) or increase (20%) their cash levels this year. Asia-Pacific institutions seemed especially keen on cash, with a third planning to raise their cash holdings in an effort to protect their portfolios.
The poll also discovered a forthcoming shifting of priorities and focus within institutional equity portfolios. The three foremost considerations cited by survey participants were to reduce public market risk (41%); increase allocations to alpha-seeking strategies (32%); and an increased emphasis on environmental, social, and governance (ESG) strategies and impact investing (28%).
“In a world of increased market volatility and great levels of uncertainty, clients are reimagining what they do with their risk assets,” Conway said. “It’s important for clients to stay invested, with equities continuing to have a very significant role in portfolios and alpha seeking-strategies making particular sense in the current climate. We’re seeing clients becoming more purposeful about their alpha exposures going forward.”
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