Survey: Institutions Overhaul Their Portfolios — and Save Money Doing It

A new survey by investment consultant bfinance says asset owners are shaking up their portfolios to meet their return targets, adding more alternative and illiquid investments. What’s more, they’re spending less on fees in the process.

(Illustration by II)

(Illustration by II)

Institutional investors are making significant changes to their investment portfolios to address the increasingly wide distance between their return targets and the gains they can expect to make from traditional strategies — and the changes they are making are saving them money, a new survey shows.

These changes include ramping up allocations to alternative investments and adding new asset classes to their portfolios, according to the survey, conducted by investment consulting firm bfinance. The firm polled 485 institutional investors around the world managing a combined $8 trillion in assets. Bfinance said 66 percent of survey respondents were from pension funds, with the rest coming from endowments and foundations, sovereign wealth funds, insurers, healthcare institutions, and others.

“There has been a bit of a revision down, over the last ten years, of return objectives, but maybe not enough if you look at a 60/40 traditional portfolio,” said Kathryn Saklatvala, director of investor content for bfinance and the author of the report, in a phone interview.

Some 66 percent of investors surveyed said they have entered a new asset class or strategy in the past few years — among them are private debt, infrastructure, real estate, emerging market equity, and alternative risk premia — and another 9 percent said they plan to do so within the next 12 months.

Private markets are particularly popular now, with 49 percent saying they have ramped up their allocations to those markets, although 46 percent are still underweight versus their allocation targets for these investments, for factors including slower-than-expected capital drawdowns and difficulty finding the right managers and opportunities.


The increased complexity of institutional investor portfolios has not translated into increased costs, however. Interestingly, the survey found that allocators’ average costs have actually decreased rather than increased over a three-year period. For example, 51 percent say they are paying less in external manager fees than they did three years ago, compared with 17 percent who said they are spending more.

“I was fascinated and surprised by this — It was counterintuitive,” said Saklatvala, who added that the cost-cutting hasn’t just been achieved by investors slashing active equity management exposure. “We found the investors who had been adding illiquid investments were more likely to have reduced costs than their peers.”

Investors have managed to cut costs in part by renegotiating fees and doing more co-investment deals. Saklatvala noted that moving into illiquid markets may cause investors to take a closer look at how much they are spending and how they can achieve cost efficiencies. Also, the investors who have been more likely to add illiquid investments tend to skew larger, and these are the types of investors who have greater negotiating power, she added.

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In Europe, private debt is the most popular new addition to institutional investor portfolios, with about 65 percent of allocators there saying they have added the strategy in the past three years or intend to do so in the next 12 months, compared with more than 40 percent of North American investors. Among the latter group, infrastructure was the most popular new addition, followed by real estate, emerging market equity, and private debt, respectively.

The survey found that a “disproportionately large” number of investors in the Australia/Pacific and Australia/MidEast categories are entering hedge funds, at 38 percent versus 26 percent globally. In the Australia/Pacific category specifically, investors have become particularly active in alternative risk premia strategies, which seek to mimic hedge fund performance, the survey found. Bfinance says the strategy hits a trifecta that is popular with these investors: liquid, low-cost, and systematic.

The survey also found that 31 percent of all investors surveyed have moved toward passive management, even as they expect active equity managers to outperform over the next year, and 20 percent have shifted toward smart beta over the past three years. Furthermore, 41 percent of investors surveyed have tweaked their hedge fund portfolios to reduce their directional equity exposure over the past three years, with another 14 percent saying they will do so in the next 12 months.

“In terms of the performance expectation, there has been a lot of debate about rockier times ahead that are going to favor active managers — that sentiment is filtering through to investors,” said Saklatvala, who noted that investors are not shifting to passive or smart beta strategies because they think they will outperform. “It’s about making smarter use of fee budgets and risk budgets.”