Many investors are significantly reshaping their approach to risk management and asset allocation as they diversify their portfolios in response to rising geopolitical tensions, higher interest rates, persistent market volatility, and upcoming electoral processes. These are some of the main conclusions drawn from the annual survey by Nuveen, TIAA’s investment management arm, of more than 800 institutional investors worldwide.
“In our regular interactions with clients and in our recent survey of over 800 institutional investors, we gauge how $18 trillion in assets will be put to work and managed over the next two years,” explains Mike Perry, head of Nuveen’s Global Client Group.
According to Perry, three clear themes dominate investors’ attention when positioning portfolios in the new environment: “The first is the immense appetite for exposure to energy innovations and infrastructure projects as the energy transition progresses. The second is the preference for private corporate debt and venture capital in a context of growing capital allocations to alternative investments. The last is that, to position themselves in a way that they can take advantage of these opportunities in time, investors allocate a portion of their portfolio capital to high-quality, liquid fixed income instruments.”
Energy Transition
For 55% of the global investors who responded to Nuveen’s annual EQuilibrium Global Institutional Investors survey, they believe they can significantly influence the energy transition through their investments, and 57% indicate that they have or are seeking exposure to alternative energies (renewables, nuclear, hydrogen). Additionally, 51% are interested in allocating funds to new infrastructure projects, such as those related to grid energy storage and battery storage.
In Asia-Pacific (APAC), the interest of corporate pension funds in nature-based solutions is above average, and in Germany, pension funds show an above-average interest in carbon credit markets. Meanwhile, North American public sector pension funds indicate an interest in improving existing infrastructures that is above the survey average.
Nearly 90% of investors (88% globally, 81% in North America, 93% in the EMEA region, and 89% in the APAC region) are focused on the energy transition in one way or another. According to the survey, the smallest group, at 9%, are pioneers in the energy transition. The largest group (37%) “keeps pace,” as they structure portfolios to reflect the current energy mix in the economy, while 23% are “starting” and 19% are doing what is necessary to comply with regulatory requirements.
“Investors clearly understand their influence and consider state policy and technical innovation as the biggest drivers of investments in the energy transition for the year ahead. 39% believe politicization will be the biggest obstacle and highlight the importance of partnering with active managers who have solid experience in seeking and exploring the most attractive opportunities,” adds Perry.
Private Markets and Their Appeal
The survey shows that investors continue to bet on private markets, as 55% (60% in North America, 49% in the EMEA region, and 59% in the APAC region) plan to increase their allocations in the next five years, with private credit and venture capital as the main options. The trend, however, is less pronounced compared to last year’s survey, when 72% (73% in North America, 67% in the EMEA region, and 79% in the APAC region) expected to increase allocations to private markets.
In fact, some investors also plan to increase their allocations to private real estate (24%), commodities (22%), hedge funds (21%), private placements (19%), and forest land and agricultural land (12% in both cases).
APAC public sector pension funds are leading, as 72% plan to increase investments in private markets in the next five years. North American insurers and endowment/foundation funds are not far behind, with 68% and 71%, respectively.
Lastly, private corporate debt and venture capital are considered the most attractive asset classes among investors looking to bet on alternative investments, led by North American public sector pension funds (57% plan to increase private credit) and Japanese investors (59% plan to increase it in venture capital). Although interest in private corporate debt and venture capital is generally high across all regions, it was not the first choice in all: private infrastructures were the first choice for German investors (53%).
Reducing Risks
Nearly two-thirds (65%) of surveyed investors (62% in North America, 68% in the EMEA region, and 63% in the APAC region) assert that we are in a new market environment that is changing the way they manage risk and return. Eight out of ten (81% in North America, 81% in the EMEA region, and 78% in the APAC region) state that the era of ultra-low interest rates has been left behind to enter a context of higher interest rates for longer.
Half of the investors (50% globally, 53% in North America, 48% in the EMEA region, and 50% in the APAC region) plan
to increase their portfolio duration in 2024 (in last year’s survey, only 39% of investors planned to increase the duration). At the same time, the percentages of investors planning to strengthen “inflation risk mitigation” and “liquidity” strategies decrease compared to the previous survey (from 64% to 41% and from 41% to 37%, respectively).
For liability-oriented investors, higher interest rates and the resulting improvements in funding states represent an opportunity to reduce portfolio risk by adding duration.
The normalization of interest rates has created new opportunities for many investors to reduce risk, moving away from equity markets and towards high-quality public and private fixed income. Compared to last year’s survey, a significantly larger number of investors are reducing exposure to equities (40% globally, 33% in North America, 44% in the EMEA region, and 44% in the APAC region) compared to those increasing it (28% globally, 25% in North America, 26% in the EMEA region, and 37% in the APAC region).
Nearly half of the investors (48% globally, 49% in North America, 49% in the EMEA region, and 44% in the APAC region) state that they plan to increase their allocations to investment-grade fixed income, likely reflecting investors’ expectations of an upcoming economic slowdown. 38% plan to increase their allocations to private fixed income, where investment-grade corporate debt is the main option.
About one in five investors also indicates that, in the next two years, they plan to increase allocations to listed securitized debt (CLO, MBS, etc.; 22%) and to sub-investment-grade fixed income (high yield or junk bonds, widely syndicated loans, etc.; 21%).
“In all segments of fixed income, corporate debt is attracting investors’ interest. Corporate instruments are the first choice for investors aiming to allocate capital to both investment-grade and non-investment-grade fixed income markets, as well as to private fixed income markets. Investors see more value than before in these fixed-rate debt instruments. And for those more liability-oriented investors, high-yield fixed coupon bonds have become an attractive way to improve liability management,” Perry notes.
According to the survey, although investment-grade corporate debt is generally the first choice for planned allocations to private fixed income, there is dispersion among different types of investors. Insurance companies show a greater preference for private infrastructure debt, while endowments and foundations opt for opportunistic private debt, and North American public sector pension funds decisively opt for middle-market senior loans.