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 per cent of respondents’ portfolios in equities and 31 per cent 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.”
Demand for real estate was particularly strong in Europe, with almost 41 per cent of respondents seeking to increase their direct real estate investments, followed by Asia (29 per cent) and North America (17 per cent).
North American institutions are the biggest investors in direct real estate, with an average allocation of more than 8 per cent, compared with 5 per cent for Europe and just 2 per cent for Asia.
Almost 20 per cent 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 per cent 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 per cent of their portfolios in foreign and global equities, 16 per cent in domestic stocks, 14 per cent in foreign/global fixed income and 17 per cent 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 per cent of respondents believed private debt would produce the most favourable fixed income returns during the next 12 months, 29 per cent said high yield corporate bonds while only 2 per cent 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.
“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,” Mr Fasso continued.
View the full report.
About the AMP Capital Institutional Investor Report
The second AMP Capital Institutional Investor Report was prepared by Institutional Investor Research. During Q2 2013, more than 65 senior decision makers from large institutions in Europe, the Middle East, North and South America and Asia (including Australia and Japan) were surveyed to collect historic asset allocation data and asset allocation intentions. Collectively these financial institutions manage an estimated US$2.1 trillion.
Eighty-nine per cent of respondents were employed by firms with US$1 billion or more in assets under management, with 8 per cent managing more than US$100 billion (such as pension funds, foundations, endowments, sovereign wealth funds and family offices). Thirteen per cent of respondents were located in Asia, 44 per cent in Europe and the Middle East and 43 per cent in North and South America.
Institution type is categorised by: pension fund (corporate or public) – 43 per cent; other – 22 per cent; insurance – 13 per cent; foundation or endowment – 10 per cent; sovereign wealth fund – 10 per cent; family office – 2 per cent.
About AMP Capital
AMP Capital is a specialist investment manager with more than A$131 billion in funds under management as at 30 June 2013 and more than 250 investment professionals. AMP Capital is one of the most experienced global infrastructure managers with more than 20 years’ experience and in excess of 100 infrastructure (equity and debt) investments globally since 1988. AMP Capital was one of the first to invest in infrastructure when it participated in the financing of the Sydney Harbour Tunnel, Australia in 1988.
AMP Capital’s European infrastructure business invests in a portfolio of infrastructure assets diversified by European countries and sectors including, energy/utilities, transport, social and asset life cycles.
AMP Capital manages unlisted and listed infrastructure investments in Asia, Europe, North America, Australia and New Zealand. AMP Capital is a subsidiary of AMP Limited. Established in 1849, AMP has more than 160 years of experience providing financial services and is one of Australia's largest retail and corporate pension providers.