Institutions aren’t just worried about the effect of inflation, the pandemic, and what they fear are outdated asset allocation rules. They’re potentially moving a vast amount of money that will create opportunities and challenges for asset managers — and move markets.
Those are some of the findings from Nuveen as part of its 2022 global institutional investor study, which is expected to be published on Wednesday. Sixty-four percent of investors told the asset manager that the current market environment is pushing them to entirely rethink their portfolio construction strategies. In the survey of 800 institutions, each of which had a minimum of $500 million in assets, Nuveen found that the overhaul is being prompted by multiple head-shaking developments — including inflation rates that haven’t been seen in 40 years, the pandemic, and climate change — that are affecting the value of assets not just in the future, but today.
Approximately 66 percent of investors say they are more worried now than they were two years ago about extreme and disruptive market events. More than half of investors, or 51 percent, even say that “fundamental market dynamics have lost relevancy.”
“I do believe that we are truly at an inflection point,” said Nathan Shetty, who oversees Nuveen’s multi-asset team and provides advice to clients on model portfolios, capital markets views, asset allocation, and other matters. He noted that the current generation of money managers, capital allocators, and institutional investors hasn’t had to deal with issues like inflation, the effects of central bank and government policy, responses to the pandemic, societal changes, and climate risk, to name a few. Shetty added that the survey was conducted before Russia’s invasion of Ukraine, which has likely only exacerbated many of the issues highlighted by the survey.
“It’s a confluence of significant pools of capital being impacted by markets and external factors, [which] are in aggregate causing CIOs to have to rethink how they’re going to meet their seven percent,” added Mike Perry, who oversees Nuveen’s global client group.
Shetty said that the nervousness about extreme events comes down to the “risk of risk.” “There’s a lot more variability in the risk,” he added. “These oscillations in the risk are becoming wider and more frequent, and that is sort of indicative of these extreme events. But what it can’t capture is the unknown unknowns.” Shetty said that these, of course, can’t be hedged against. But investors can analyze and get their arms around the risks of, say, a major cyberattack on their portfolio or the financial system, including what happens if they can’t access their money.
On the return side of portfolios, Nuveen says that investors need to plan for lower future returns in conjunction with inflationary pressures.
Not surprisingly, the firm found that alternatives are one option, with private credit highest on the list. Three-quarters of investors say that they will try to increase yield overall within the next two years, with 62 percent specifically considering increased allocations to alternative credit. Thirty-one percent say that they plan to increase these assets over the next two years. Private credit can be attractive, in part, because it is a floating rate — as rates move higher, so does the portfolio’s yield.
Even though 61 percent of investors told Nuveen that they are increasing measures to hedge inflation over the next 12 months, respondents are split on whether they plan to increase or decrease the market risk and credit quality risk of their portfolios. More investors, 43 percent, are increasing the liquidity risk in their portfolios, while only 32 percent are decreasing it.
“Two years ago, the answer [on inflation] would have been profoundly different,” Shetty said. Real estate, infrastructure, and commodities are all back in focus as an alternative to bonds. Shetty said that with these assets, institutions are well aware of the need to balance different objectives, including inflation and sustainability. “We need commodities to develop renewables. Same with infrastructure,” he said. “You can participate in the green evolution and also address inflationary pressures. These are nuances that institutions are struggling with.”
Nuveen also found that 72 percent of investors believe that climate risk is investment risk, a move that the asset manager says takes the discussion of global warming out of the realm of the theoretical and into the practical. “If you hold a company or private asset, you have to understand what will climate do to that? Valuations are changing, and as a fiduciary you have to address it,” said Perry.
Seventy-nine percent also told Nuveen that the transition to a low-carbon economy is inevitable, and 86 percent said that the transition will create new investment opportunities. Eighty-seven percent say that they consider ESG when putting money to work, or that they plan to within the next year. But there are holdouts. In North America, one in five say they have no plans to do ESG-focused investing. Investors cite reputational risk and “doing good while investing well” equally as the top motivations for using ESG as a lens; one in three of those said that pressure from stakeholders is driving the category.