Alts Grow Bigger and Bigger in Institutional Portfolios

Institutional investors are embracing alts in a big way: 86% of them now have money in alternative investments. What’s more, of those, two-thirds plan to increase their allocations this year.

That’s the finding of a survey of pension, endowment, insurance, and other big investors, as well as consultants, done by Nuveen, the investment manager for TIAA. The catalyst for this trend is the pandemic, the study stated, contending that the “crisis has brought some new approaches to the daily work of investing, including the due diligence process.”

More and more, these investors are driving alt investments on their own, without the use of outside managers. They are buying real estate and taking private equity (PE) stakes themselves, according to the survey, conducted late last year.

What are the most popular among the items on the alts smorgasbord? Real estate, cited by 80% of the 700 respondents, followed by 70% who are invested in private equity and 63% in infrastructure. More than half (55%) of alternatives investors said they plan to make a strategic shift away from public to private markets in the next 12 months.

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“In a low-return environment, the shift to private asset classes and other alternatives has accelerated as more and more investors search for sources of alpha that are idiosyncratic— that is, not strongly correlated with other kinds of assets,” said Mike Perry, head of the firm’s global client group.

They are also looking for alt investments that favor environmental, social and governance (ESG) precepts: Some 69% said they’re seeking ESG-oriented investments this year.

At the same time, they are taking a cautious approach. A large number, 79% of investors, said they had made no significant changes to portfolios last year due to COVID-19. Nonetheless, more than half (52%) reported the pandemic market impact will drive portfolio changes in 2021— the most often cited factor. Market volatility and interest rate changes were the two next most important influences, both cited by 42% of investors.

While ESG investing is becoming more mainstream, not all the investors agreed on how important it is. Just 39% indicated that ESG is a valid driver of alpha.

Although 59% believed ESG can help mitigate headline risk, only 36% concurred that it was on par with other investment factors when evaluating risk/return profiles. But only 26% percent agreed that “ESG is a trend rather than a core, long-term investment strategy”; 22% were neutral on the statement, while 53% disagreed.

Reflecting on a year of rising attention toward societal inequity, some institutional investors reported they were looking at enhancing their inclusion and diversity practices.

About four in 10 were planning changes to these practices in 2021. Meantime, one-third of investors were unsure about planned changes; 23% acknowledged that they have no changes planned.