With Regime Change, Institutions Are Rethinking Their Portfolios

Not content to sit through a period of rising inflation, interest rates, and geopolitical tensions, asset owners are not just adding new funds — they’re rethinking their entire portfolios.

“I’ve been in this business for decades, and long-term institutional investors tend to be very measured in terms of changing allocations,” said Nathan Shetty, head of the multi-asset team at Nuveen. “Experiencing 2022 really catalyzed and made real to them that a real regime shift was in progress.”

According to a new survey from Nuveen, 59 percent of responding institutions said that they’re either actively rethinking their portfolio strategy or reallocating capital to a greater degree than usual.

More specifically, 27 percent said they’re making strategic asset allocation changes, 38 percent said that they’re making tactical allocation changes, and 48 percent are shifting their capital market assumptions.

This is a big deal. “Institutions always do this, but to the extent to which this affects longer-term strategic allocations, I think that is a bit new and is larger in magnitude,” Shetty said.

These were just a few of the results of Nuveen’s annual EQuilibrium Global Institutional Investor Survey, which surveyed 800 global institutional investors in November. Investors believe a real market shift is happening, particularly that inflation will last beyond a year or two, according to the survey.

“This is just not going to snap back to the inflation levels that we had prior to last year,” said Mike Perry, head of Nuveen’s global client group. “It’ll extend for a longer period of time. This idea of not being protected against inflation, you can’t not address that anymore.”

The survey showed that 64 percent of investors are specifically zeroed in on inflation-mitigation efforts. Half of the respondents said they plan to employ an inflation-mitigation strategy for between two and three years, while 14 percent said they expected to do so for even longer.

Shetty noted that infrastructure “tended to bubble up to the top of institutional investors’ top choice for reallocation.” Indeed, 58 percent of respondents said that they plan to increase their allocation to infrastructure — a huge jump from 2020, when just 34 percent said the same thing. Other inflation-mitigating strategies that are popular among respondents included inflation-linked bonds and commodities.

“Everything that didn’t work over the past 15 years are the things that I see institutions taking an interest in,” Shetty said. “The other thing that I’ll say in terms of strategic asset allocation that is fascinating is that cash is actually being viewed as an asset class again.”

Considered a drag on portfolios for years while interest rates and inflation stayed low, cash is starting to generate yield and, in the process, is raising the bar for allocating to riskier capital.

Shetty said he is starting to see allocators take a barbell approach between maintaining liquidity through cash and similar exposures and putting capital to work in illiquid private markets. The usual in-between — public equities and fixed income — are less interesting to investors who have lost money in these asset classes.

“When they looked at your traditional fixed-income and equity portfolio, investors found that it wasn’t working,” Perry said. “What they thought may be a hedged portfolio wasn’t. That was a catalyst for them to think about restructuring.”

Although the survey was conducted ahead of the recent banking crisis, Shetty did throw some light on what investors are thinking.

“Markets are dynamic [on a daily basis] and evolving very rapidly, particularly at this juncture,” he said. “What’s likely to transpire is less lending, less profitability for banks, [and] tighter lending standards. Ultimately, what ends up happening is you don’t have as much growth potential in the economy.”