Investor focus turns to portfolio strength, social issues
Why investors are looking to alternatives, private markets for opportunity.
Although many institutional investors refrained from making portfolio changes during the pandemic, pandemic-related market changes will be a major factor in portfolio decisions in 2021, according to a survey by Nuveen. In addition to portfolio changes, the survey uncovered an increased focus on social issues among institutional investors.
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Nuveen surveyed 700 global institutional investors and consultants in October and November 2020 to learn more about how they were reacting to changing market conditions and expectations of employees.
“With simultaneous crises in global public health, as well as in economies and markets worldwide, 2020 offered us an extraordinary opportunity to assess the practices and attitudes of major institutional investors in managing both portfolios and day-to-day operations,” Michael Perry, head of Nuveen’s Global Client Group, said in a statement.
The survey found that eight in 10 institutional investors made no significant portfolio changes in 2020, but the most common reason for changes this year was the pandemic (52%). Some of those changes include:
- An increased focus on multi-asset strategies. Nuveen found that 58% of investors were taking a multi-asset approach, the most popular one. Investors are facing a number of challenges: a low-return environment, “idiosyncratic risk factors,” access to private markets and how to align ESG investments with their organizations’ values, according to the report. Liability-driven and outcome-oriented investing were also popular strategies, with over a third saying they were relying on one of these strategies.
- Increasing allocations to alternatives. Ninety-two percent of investors are currently investing or plan to invest in alternatives in the next year, according to the survey. Infrastructure investments may be the most popular in 2021, as 34% of investors said they are planning to increase their allocations, followed by real estate and private equity, each at 27%, and private credit at 26%. Nuveen also found that investors are approaching private markets more tactically. More than half are making a strategic shift out of public markets, according to the survey.
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“In a low-return environment, the shift to private asset classes and other alternatives has accelerated as more and more investors search for sources of alpha that are ‘idiosyncratic’ – that is, not strongly correlated with other kinds of assets,” Perry said. “Rather than tapping private markets opportunistically and tactically to boost returns, investors are making private investments a more strategic and critical part of their investment approach.”
Social impact
In addition to portfolio changes, Nuveen found that managers are thinking about their social impact. Thirty-four percent said “organizational values and sense of social responsibility” was their main consideration in integrating ESG investing into their strategy. However, although 70% believe ESG should be fully integrated into investment decision making, only 39% believe ESG investments are a valid source of alpha and 26% believe they are just a trend, rather than a long-term strategy.
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A lack of ESG standards are a significant barrier to more widespread adoption and integration, with 58% of investors saying this is an obstacle, as well as return targets (42%) and reporting (40%).
Amy O’Brien, Nuveen’s global head of responsible investing, said that more investors need more information to get comfortable integrating ESG factors into their investment strategy.
“More and more, market research is helping make the case that ‘responsible investing’ can deliver competitive returns, but clearly there is a need to put more effort into validating the investment proposition along with the positive impact,” she said.
One ESG element stands out, as investors reported concerns about employee well-being, particularly mental health, and diversity initiatives.
Forty-four percent of investors are planning changes to their diversity and inclusion practices. This commitment was stronger among consultants, 57% of whom said they were enhancing their practices over the next 12 months, compared to 42% of asset owners. The most common change was in talent management, as 67% of respondents said they would address diversity in their hiring, retention and promotion processes. Other changes included reviewing the diversity of boards and committees (53%) and increasing organization-wide accountability measures (46%).
Over half of investors are concerned about employees’ mental health, while about four in 10 reported concerns about burnout and stress. Meanwhile, investors are split about remote work. While 67% said they were more productive working from home, 78% acknowledged it’s been harder to manage teams.
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