Clients of outsourced chief investment officers are planning to trim their exposures to stocks in favor of alternative assets, according to Cerulli Associates.
The consulting firm said in a report Monday that OCIO providers expect clients such as endowments, foundations, and pensions to broadly increase their private investment holdings. Alternative asset classes such as real estate, infrastructure, private debt, and private equity should benefit from increased allocations, Cerulli found in its survey of OCIOs.
Institutional investors are shifting their allocations to private investments partly to protect their portfolios in a downturn, according to the report. Low interest rates have also prompted a search for yield in alternative assets as asset owners try to meet their return targets.
Investors are “paying close attention to portfolio diversification and the low correlation of many alternative asset classes to public investments, particularly equities,” said Laura Levesque, senior analyst at Cerulli, in the report. “Persistent single-digit equity returns and relatively low interest rates make it challenging for investors to reach target returns using only public investment opportunities.”
The “intense” demand for alternative assets has created increasing competition for top fund managers, according to Cerulli.
Alternative managers are most optimistic about attracting public pension funds as investors, followed by corporate pension plans and ultra-high-net-worth individuals and families, the consulting firm’s research found.
Public pension funds are by far the largest investors in private equity by total capital committed, followed by corporate pension plans and insurers, according to the Cerulli report, which cited Preqin data. Sovereign wealth funds, endowments, and foundations are the next biggest private equity investors.
Cerulli’s survey of OCIOs found that institutional investors are broadly bullish about private equity, with endowments and foundations planning to either maintain or increase their private equity allocations over the next year. Ninety-two percent of health-care and hospital system are expected to do the same, compared with 89 percent of corporate pension plans.
Meanwhile, the hedge fund industry is gaining interest from investors beyond pension funds.
“While public and private pensions number among the industry’s largest investors, representing close to 40 percent of total hedge fund capital in 2017, other client types are gaining in importance,” Cerulli said in the report. For example, private wealth clients, including wealth managers and family offices, are among the fastest-growing sources of hedge fund capital, according to the consulting firm.
“Shifting market conditions, including rising volatility, drive demand for varied strategies,” Cerulli said. “Investor interest in global macro and multi-strategy credit could indicate greater interest in volatility dampening strategies.”