Alternatives Gain Bigger Share in Investor Portfolios

While alternatives are inarguably set to continue gaining a bigger share in investor portfolios in the current low interest-rate environment, institutional investors are also becoming increasingly selective when it comes to capital deployment, cautions Frank La Salla, chief executive officer of alternative investment services and structured products at BNY Mellon.

Mr. La Salla, in driving home his point, cites the demand by institutional investors for greater transparency and growing levels of data to support decision-making when it comes to alternative investments.

A recent BNY Mellon study entitled Split Decisions: Institutional Investment in Alternative Assets found that institutional investors are seeking to allocate more capital to alternative strategies, in their quest for higher returns.

The study surveyed 400 senior executives from institutional investors around the world including pension funds, investment managers and insurance funds, as well as 50 hedge fund executives.

The report also found that among the various alternative asset classes, private equity (PE) is the most favoured by institutional clients, taking up to 37% of their portfolios. This is followed by infrastructure (25%), real estate (24%) and hedge funds (14%).

However, a separate study by Invesco entitled the Global Sovereign Asset Management Study 2016 found real estate to be the primary driver of increasing allocations to alternatives in recent times; allocations to real estate have increased faster than that of both PE and infrastructure combined, rising from 3% to 6.5% over a three-year period, which represents a 29% compound annual growth rate.

According to the BNY Mellon report, nearly two-thirds of those surveyed said alternatives had delivered returns of at least 12% last year, whereas more than a quarter had achieved returns of 15% or more from their allocations to alternatives. Additionally, while 39% of those surveyed plan to increase their allocations to alternatives, only 6% say they will moderately reduce their exposures.

The report also found that emerging markets (EMs), on average, made up 31% of institutional investors’ allocations to alternatives. For Asia Pacific-based investors, EM-based investments accounted for 54% of their alternative portfolios, followed by investors in EMEA (Europe, Middle East and Africa) at 29%, and the Americas at only 16%.

When it comes to PE investments, 62% of those surveyed said they would look for lower management fees, whereas 55% would request for more transparency as they look to optimise value.

Downward fee pressures have also been experienced by hedge fund managers, with 78% of those surveyed saying that they would consider reducing their management fees over the next 12 months.

Jamie Lewin, head of product strategy and performance management at BNY Mellon Investment Management, opines that a steady stream of new products and strategies would support the continued growth in allocations to alternatives.

“Innovation and adaptability will be two key differentiators that determine which firms succeed in capturing what’s become an integral part of institutional portfolios,” he says. - asiaasset