Asset allocation: Opportunities ahead
Key findings on asset management trends from the latest Nordic Investor Survey
- Real assets approaches have widened to embrace a wider range of solutions
- Internal management continues to increase
- Interest in alternatives is also rising
The ongoing challenge to generate satisfactory yields across both listed and unlisted asset classes heavily influenced how institutional investors in the Nordic region positioned their investment portfolios for 2017.
While traditional asset classes are generally still core strategic allocations, it is clear from our research that the interest in more complex and illiquid investments is growing – especially in credits. Therefore, initial moves into real asset investments have today developed into more opportunistic approaches that use a wider range of alternative solutions.
As investors move further out of the complexity and illiquidity curves, the need for cutting costs elsewhere in the portfolio is apparent, and investors increasingly look to reduce costs in the more traditional asset classes, such as developed market equities and bonds.
Increased cost pressure is, in turn, leading the way for passive mandates and the internalisation of these asset classes, and the share of internal management among institutional investors in the Nordic region continues to increase – our research suggests that more than 60% of Nordic institutional investors’ total assets under management are internally managed.
Despite their overall shrinking share of assets, external managers continue to be relevant, not least due to investors’ increased interest in more complex allocations, but also due to increased focus on ESG. This is, to some extent, also a contributory factor in limiting the appetite for passive investments, as a result of the lack of proper and well-tested ESG-compliant indices.
In 2016, equity allocations increased among institutional investors in the Nordic region, and a combination of rising stock markets and overweight in equities was a decisive factor. Danish and Finnish investors’ equity exposure increased the most compared with last year’s allocations.
Fixed-income allocations were generally reduced in favour of higher-yielding opportunities in alternatives. The Nordic investors have roughly 20% of their assets tied in alternative investments, with great variation across the Nordic countries. Norwegian investors have the lowest allocation, and Swedish investors have the highest, with nearly 23% of their total assets allocated to alternatives.
When comparing investors’ interest in this space, it is apparent from search activity that the increased interest in alternative asset classes translates into new mandates for managers to a great extent. However, ambitions to manage alternative assets internally are growing rapidly – a topic that has been covered in details in our recent research. It is very important for managers to be aware of exactly this in order to use the opportunities and focus their efforts.
Mikkel Kirkegaard Hansen is an investment consultant at Kirstein