Institutional Investors Seek Low-Risk Assets, More Diversified Portfolios

U.S. investment professionals are increasing their exposure to low-risk assets, while also seeking portfolios that are more diversified, according to MFS investment Management, which polled 112 U.S.-based investment managers.

After inflation took center stage in 2023 and missteps in the banking industry disrupted lending, the survey’s participants said they are shifting their focus to global risks, including geopolitical instability. According to the survey, half of respondents believe an economic contraction might occur during the next year.

These risks have managers seeking risk-aware and diversified investments. In the fixed-income markets, 52% of respondents said they have raised duration in their bond holdings. One out of every three respondents said they expected to augment U.S. credit allocations over the next year, as rising yields make fixed income more attractive to investors.

“Recent actions taken to de-risk portfolios are understandable as we believe the full effects of higher interest rates have yet to be felt,” said Jonathan Barry, managing director of the MFS Investment Solutions group, in a statement. “That said, higher rates make fixed income more attractive now, and our survey shows that investors see opportunities across a number of asset classes.”

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Similar to the MFS results, research by CoreData Research, from a survey of 100 institutional asset allocators in September, found similar sentiments. Half of those respondents identified fixed income as the top asset class for risk-adjusted returns.

According to the survey, managers had these views on various asset classes:

75% responded that U.S. growth stocks are overvalued;
63% reported emerging markets are undervalued;
59% of respondents said U.S. small caps were attractive opportunities;
54% of respondents identified international equities as attractive; and
Nearly two-thirds of respondents said small- and mid-cap stocks will outperform large caps in the next one to three years.

The survey was conducted between May 31 and June 5. Respondents manage assets of at least $1 billion and represent a variety of institutions and firms.

Several survey responses showed that investors increasingly want exposure outside of the U.S: 37% of respondents said they want to increase exposure to international equities, while 27% want exposure to emerging market debt.

Managers want to invest in companies with low debt levels, stable earnings and consistent growth, according to MFS. The survey also found that one-quarter of respondents wanted to increase their exposure to infrastructure, which tends to provide stable cash flow. One in five respondents said they want to increase exposure to private equity and debt, despite a weak year for the asset class.

“Being mindful of risks and valuations while seeking portfolio diversification makes sense at this stage of the cycle,” Barry said. “We believe a proper balance across regions, sectors, styles and duration can be an effective way to guard against market risks.”