Northern Trust released a study of asset owners and surveyed them on their asset allocation, investment strategy, liquidity, technology adoption and operational efficiency.
The report, “Asset Owners in Focus,” is Northern Trust’s inaugural annual peer study on asset owners. Northern Trust surveyed 180 asset owners in North America, Europe, the Middle East and Africa and the Asia Pacific regions.
Survey respondents included pension funds (20%), outsourced CIO’s and multi-managers (20%), family offices (18%), endowments and foundations (14%), insurance general accounts (13%) hospitals (12%) and central banks, sovereign wealth funds and superannuation funds (3%).
Asset Allocation
The typical asset owner portfolio, according to Northern Trust, has a 42% allocation to public equities, 27% to fixed income, 13% to private markets investments, 11% to cash and 7% to absolute return strategies.
Liquidity is more important than ever for asset owners, especially as more and more are allocated to the private markets. According to the study, 68% of respondents invest in alternatives, and 50% of respondents said that higher cash reserves are a strategy to manage liquidity.
“We have seen liquidity management really come to the forefront over the last two years, particularly as our clients are trying to get more out of cash as an asset class but also learn to use their balance sheets in creative ways,” says Melanie Pickett, head of asset servicing, Americas at Northern Trust.
According to the study, asset owners who allocate more than 20% of their portfolios to alternative investments consider risk management to be a top challenge. “That shift towards alternatives introduces new complexities, both in terms of investments as well as operational risk,” Pickett says.
Approximately 21% of investors surveyed, that are invested in the private markets, reported having an allocation to digital assets, primarily through exchange traded funds. Asset owners “may receive it as a distribution from a private equity fund, or as a gift in the case of a university or foundation, but ETFs would be the most used vehicle.” Pickett says.
Technology, Service Providers Becoming More Important
The increasing complexity of asset allocation has led to asset owners adopting more technological solutions. According to the survey, 79% of respondents are increasing their adoption of technology to improve their operations.
According to the survey, 68% of asset owners said that research is an investment challenge where service providers can help, followed by investment analytics support (52%), data support and reporting solutions (47%), investment due diligence support (46%), and thought leadership (42%).
“They really are trying to understand each part of the market, the macro factors, what’s going on in every geography and segment and sector,” Pickett says. “And that’s a lot of research for very small investment teams to do.”
The increasing complexity of investment operations has also led to more asset owners outsourcing their investment operations. Approximately 27% of respondents outsource these operations, most prominently in the Asia Pacific region (40%), followed by North America (31%) and Europe, the Middle East, and Africa (13%).
According to Northern Trust, large asset owners and small ones were the most likely to outsource. Allocators with larger holdings typically have more sophisticated portfolios that require additional resources, while those with smaller portfolios may outsource due to having smaller teams.
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