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Many asset managers targeting the institutional market often joke about their desire for a crystal ball that would provide foresight into the investment strategies that will be attracting the most assets in the next couple years. Armed with this knowledge, firms could then focus their efforts on developing and promoting their capabilities in the areas poised for the greatest growth. While not a crystal ball, our US Institutional Investor Brandscape® report provides a view into the key asset classes and investment solutions that are of most interest as well as the context that explains the factors driving demand for future mandates.
The allocation of institutional assets across asset classes has remained fairly stable over the past year, with smaller institutions concentrating their assets in US equities and US fixed income and larger organizations employing a more diversified approach. Yet we are seeing increased interest in investing in asset classes that offer higher potential return, such as private equity, real estate and alternatives. Overall, institutional investors appear to have their sights set on active management for the near future, yet allocation to actively-managed strategies declines as asset size grows, with the largest institutions clearly preferring less traditional asset classes including private equity, real assets/commodities, real estate/REITs and alternatives.
The factors driving anticipated asset allocation changes continue to differ by market segment. The focus of pensions is clearly on de-risking, although this aspect declines slightly in importance as asset size grows. The smallest organizations in particular report a near-equal focus on seeking higher returns, which may explain their interest in private equity and alternatives. Yet the $1 billion-plus pensions are more likely to point to the need of increasing diversification, suggesting these institutional investors feel the need to monitor their exposure particularly within the fixed income category. In contrast, non-profits of all asset sizes continue to strive for higher returns and further diversification. Additionally, de-risking emerges as a key concern for non-profits managing $100 million to less than $1 billion in assets, while $1 billion-plus non-profits place more emphasis on managing liquidity and capturing tactical opportunities.