Cerulli: Institutional Investors Shifting Away from Active Strategies ‘in Favor of Illiquid Private Markets' Assets

Investors are reallocating their risk budgets to illiquid private market investments, according to a report from Cerulli. The findings were a part of Cerulli’s September U.S. Products Trends report.

“In conversations with institutions, Cerulli has found that many are reallocating their risk budgets away from traditional active strategies in favor of illiquid private market investments,” the report states.

Institutional investors are also seeking more customization in investment products as they refine their investment strategies around principles such as environmental, social and governance standards, while also seeking to lower costs that come with private market investments.

Approximately 19% of surveyed funds said they planned to increase their allocations to private comingled funds, another 18% said they planned to increase their allocations to co-investments over the next 24 months.

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Cerulli reported Investors are seeking out exchange traded funds due to their lower cost, with 38% of institutional investors seeking to increase their allocations to ETFs over the next 24 months. Separate accounts, which offer investors greater customization, are increasing in allocations across investors, despite their search for lower costs, since these vehicles typically are associated with higher costs.

“As private market exposures are more costly in aggregate, institutions with finite risk budgets must reallocate funds elsewhere to make up for the cost differential. An example of this would be reallocating funds from mutual funds to ETFs, two vehicles that are extremely similar in terms of underlying investment characteristics but vary in costs, with mutual funds generally costing more than ETFs,” the report states.

Institutional investors expect to withdraw assets from mutual funds more than any other investment vehicle. According to Cerulli, 23% of investors plan to withdraw assets from mutual funds over the next 24 months.

Cerulli notes that institutions will have to weigh the importance of cost effectiveness and customization, which can be influenced by the type of fund and resources available. For example, Cerulli notes in the report that only larger funds have the internal resources to make co-investments, which have lower expenses due to having more control over investments.

“As institutions seek to reallocate risk budgets toward private market investments, their strategies around vehicle selection are paramount to securing adequate funds. While lower-cost traditional market vehicles allow institutions to achieve this objective, the pursuit of customization often can counteract the pursuit of lower-cost funds, blurring the otherwise clearer tradeoffs between vehicles,” the report states.