Institutional Investors Show Signs of Caution After Risk-Seeking 2024

Following a year of embracing risk and doubling down on equities, institutional investors in 2025 are beginning to rein in their aggressiveness amid global market uncertainty, according to a report released by the International Forum of Sovereign Wealth Funds.

The report, based on data provided by State Street, stated that although capital flows across risk assets showed “risk-seeking behavior throughout 2024,” this has been “pared back” since the start of this year.

“In line with a rapidly changing geopolitical backdrop, investors are showing signs of caution in their portfolios,” the report stated. “Global protectionism, the impact of evolving trade tariffs, and ongoing developments with respect to Russia’s invasion of Ukraine and conflict in the Middle East continue to create uncertainty for investors.”

Nevertheless, according to State Street data, institutional investors still have an appetite for equities, with allocations remaining near their decade-long peak. But the report also stated that long-term investors “are expressing some rotation in their portfolios within asset classes,” such as a tilt toward European and emerging markets equities instead of U.S. equities. They are also exiting some of their large positions in information technology and consumer discretionary stocks. And while their geographical allocations were left mainly untouched, the report stated that the institutional portfolios leaned slightly toward allocating to global emerging markets and China.

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The outliers among institutional investors are sovereign wealth funds, according to the report, which found they “have been less keen on public equities than their peers.” Approximately half of the sovereign wealth funds surveyed for the report said they had left their allocation unchanged, while one-third said they decreased their allocation to public stocks in 2024. Two-thirds reported increasing their private equity allocation in 2024, and half said they increased allocations to other alternatives, such as real estate, infrastructure, hedge funds and commodities.

Regarding fixed-income investments, the report found that institutional investors are showing a preference for sovereign bonds in Italy, Germany, the U.K., Norway and Australia, with less interest in sovereign debt from the U.S., Canada and some other European countries.

In the currency markets, the survey data show signs that global institutional investors are unwinding their overweight positions in the U.S. dollar and Swiss franc, with a preference for Australian and New Zealand dollars, according to the report.

When asked which key factors were behind the their portfolio adjustment decisions, interest-rate changes and inflation were the top two reasons, cited by 60% and 59% of respondents, respectively. These were followed by public market valuations (55%), growth changes/recession (50%) and geopolitical risk (44%). Of the options presented, climate change and regulatory changes had the least impact on the institutional investors’ decisions at 18% and 16%, respectively.

Tags: IFSWF, International Forum of Sovereign Wealth Funds, sovereign wealth funds, State Street

Institutional investors are also increasingly investing in the private markets and embracing technology solutions, according to Northern Trust’s inaugural global asset owner peer study.

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%).

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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.