Resurgent inflation and rising interest rates, market volatility, damaging weather and climatic events, and societal inequality: Those are the disquieting forces much on the minds of the world’s major institutional investors today. And the steps investors are taking in the face of those forces to strengthen the resilience, flexibility and even the impact of their portfolios have major implications for the guidance they receive from financial advisors, now and going forward.
That is a key take-away from Nuveen’s latest EQuilibrium Global Institutional Investor Survey, which queried 800 institutional investors spanning North America, Europe, the Middle East and the Asia Pacific region regarding today’s investment landscape, current portfolio approaches, and likely strategies for the future.
Among investors, profound change across markets and around the world has made a case for a fresh look at portfolio management top to bottom, the survey suggests. About two-thirds say they are more worried now than they were two years ago about extreme market events disrupting their investment strategies. Half (51%) say fundamental long-term market dynamics have lost relevancy—and nearly two in three (64%) say today’s markets impose a greater need for investors to completely re-think how they approach portfolio construction strategies.
The survey details many of the portfolio adjustments that investors have already adopted—and also pinpoints the sectors that will be drawing the greatest scrutiny in coming months.
Inflation, Interest Rates Loom Large
Across the landscape of urgent portfolio pressures, inflation and interest rates loom especially large. Income-focused investors have long resigned themselves to the fact that they can no longer count on government bonds to produce adequate income and have been looking farther afield for yield. Indeed, three-quarters of investors say they plan to expand their reach for yield over the next two years.
For most (62%), the yield hunt has led to private credit, which investors know can be attractive in a low rate, inflationary environment because it is a floating rate investment, provides exposure to a different set of risk factors, and is less sensitive to daily market movements. Asset owners investing or planning to invest in private credit say they are targeting increases in senior middle market debt (55%), infrastructure debt (44%), and real estate debt (37%) in the next two years.
The turn to private credit is part of a broad embrace of alternatives; 83% of investors currently have an alternatives allocation. Within alternatives, real estate is the most commonly held asset class, with 80% currently allocated and 24% planning to increase allocations in the next two years.
About six in 10 alternatives investors are currently invested in infrastructure; of these, 30% plan to increase their infrastructure allocation.
Seeking To Support Positive Change
From the survey, it is clear that adjusting portfolios defensively against perceived risk is an investor priority. But risk is not the only driver: More and more, investors also are proactively deploying portfolios to support positive and necessary societal impacts. For example, signaling their rising climate change awareness, 73% of private infrastructure investors plan to allocate to clean energy infrastructure in the next two years, the highest percentage for any type of infrastructure.
The realities of accelerating climate change are top of mind for investors. In fact, climate risk (50%) along with investment management technology (51%) heads the list of the emerging trends that investors believe will be most influential to their portfolios over the next five years.