Institutions’ Growing Appetite for Risk

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The search for higher returns is the leading driver for asset allocation shifts

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The 2016 US presidential election sparked waves of populism and uncertainty. For the financial markets, the possibility of a Trump presidency seemed to cause a risk-on mentality, as his tweets were met with positive market reactions. And even before the Dow Jones Industrial Average surpassed 20,000, institutional investors signaled they were also adding risk. The survey fielding of our US Institutional Investor Brandscape report, fielded from mid-October 2016 to early January 2017, gives us a unique snapshot of the reactions of institutional investors in a distinct period for all of us.

Both pensions and non-profits de-emphasized de-risking as a driver of asset allocation changes this year. While de-risking is less of an issue for non-profits compared with pensions, this finding corresponds to the risk-on market mentality. Importantly, de-risking was the leading driver of asset allocation shifts among pensions in previous years and $1 billion-plus pensions continue to focus on risk. At the same time, corporate defined benefit plans place greater emphasis on the search for higher yield at the expense of de-risking.

Drivers of Anticiapted Asset Allocation Modifications_Chart

Among non-profits, the search for returns drives anticipated allocation changes across types and sizes. In addition, non-profits indicate the need for increased diversification as a driver of change. Specifically, the smallest non-profits along with tax-exempt organizations place less emphasis on de-risking.

This risk-on mentality is evident in the asset classes poised for increased allocations across institutional investors, such as public and private equities, real estate/REITs and commodities. As many economists forecast further expansion, high conviction active strategies (in the broad sense) are uniquely positioned for expansion among institutional investors.

For more on institutional investors, download a replay of our latest institutional webinar, Uncertainty Shifting the Institutional Market.

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Linda York

About Linda York

Linda York is a senior vice president in the Syndicated division where she leads the Wealth Management Syndicated Research & Consulting practice. She has over 20 years of experience in financial services spanning responsibilities in finance, marketing and business strategy. Before joining Market Strategies, Linda was the practice director of Syndicated Research at Cogent Research, where she managed the product development and execution process for syndicated research projects and consulted with dozens of clients in the retail and institutional wealth management space. She earned an MBA in marketing from the University of Connecticut and a bachelor’s degree in mathematics from Mount Holyoke College. Linda is an avid equestrian and a two-time finisher of the Boston Marathon.

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