Asset AllocationAugust 2, 2024

Troubles Ahead? Allocators Say They Are Ready

In a Mercer survey, asset owners say they feel ‘resilient’ about market risk and inflation.

Reported by Larry Light

Large asset owners are confident about their positioning to withstand any upcoming threats, such as stock market downturns, low global economic growth and inflation, according to a survey by consulting firm Mercer.

The poll of 61 big allocators from 16 countries found that they feel, by sizable majorities, “resilient” to problems with markets (84%), the economy (84%) and inflation (79%) over the next 12 months. The large owners—those with $20 billion or more in assets—reported being the least resilient about factors beyond their control, such as geopolitics (69%) and stagflation (64%).

Smaller allocators—those overseeing between $5 billion and $20 billion—with fewer resources reported confidence they could face difficulties, but they were not as confident as the big players: 68% of smaller allocators, for instance, reported feeling resilient about their stock exposure.

One significant upshot of the Mercer study is that large allocators reported that their organizations intend to shrink their stock holdings over the next 12 months. Their outlook for equities is “weak,” the report stated, so 22% plan to decrease their stock exposure while 19% intend to increase it.

The major allocators contended that they are well prepared for any turbulence. The study noted that “large asset owners’ confidence is partly attributable to action taken over the past year to manage risks.”

The most common step they have taken, per the report, is to lower their fixed-income duration, which measures how vulnerable their bonds’ values are to interest rate movement.

At the same time, most appear to shrug off any need to expand their liquidity profiles, such as by selling stakes in private assets, the in-vogue destination of institutional dollars in recent years, and in public stock, then moving into cash and cash-like instruments. Instead, 80% term their private holdings resilient.

The study pointed out that the asset owners reported feeling only slightly less resilient about their investments’ prospects over the next three to five years as they do about their portfolios’ current situations. Those reporting feeling vulnerable about their equities’ outlook over the next 12 months, 16% of respondents, rose to 27% over three to five years.

Furthermore, they contend they are likely to boost their ownership of private markets and sustainable strategies—none of them very liquid—in the coming year. Right now, the most popular private markets, with owners reporting at least some allocation, are real estate (82%), private equity (78%), infrastructure (75%) and private debt (71%).

These asset classes’ lack of liquidity does not appear to bother the respondents. In fact, around one-third of those surveyed reported anticipating increasing private credit and private equity investments in the next 12 months. The report indicated that this was “despite the fact that almost a quarter (21%) of private market valuations will require more attention in coming years.”

The asset owners surveyed also showed a preference that their assets be managed by third-party experts. Of the respondents, 11% reported managing more than 80% of their portfolios using internal investment teams, while 41% said they do not manage any of their assets in house.

The survey also found clear differences in the preference for outsourced investment management, based on the size of the asset owner’s portfolio. Among the largest asset owners, 36% reported that all their assets are managed externally, while among the smaller owners in the group, 47% reported outsourcing management of all their assets.

Within private-market portfolios, 82% of respondents reported outsourcing management of those investments. Outsourcing also dominated management of emerging markets equities (90%), high-yield debt (92%), emerging market debt (92%) and hedge funds/absolute return strategies (93%).

The asset classes most commonly managed internally were reported to be government bonds (43%), real assets (33%) and investment-grade credit (26%).