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Institutional Investors Rethinking Portfolio Strategies

Investment Management

Amid rising inflation and interest rates, volatile markets and climate worries, institutional investors apparently are responding to the uncertain environment by pursuing a range of portfolio strategies. 

According to findings from Nuveen’s annual EQuilibrium Global Institutional Investor Survey, two-thirds (66%) of major institutional investors are more worried now than two years ago about extreme events disrupting their investment strategies—and nearly as many (64%) believe investors need to completely rethink how they approach portfolio construction. 

Forward Looking

Against this backdrop, the portfolio strategies range from increasing investments in private assets, to addressing the risks and opportunities of climate change, and considering diversity and inclusion factors when they evaluate and hire investment managers.

“With all the complexity and rapid change now driving communities, economies and the environment, institutional investors urgently need a forward-looking perspective and the flexibility to consider new approaches,” says Mike Perry, Head of Nuveen’s Global Client Group.

Nuveen’s survey examined the views and practices of 800 global institutional investors and consultants spanning North America, Europe, the Middle East and the Asia Pacific region in October and November 2021. Respondents were decision-makers with at least $500 million in assets at corporate, public and governmental pensions, insurance companies, endowments and foundations, superannuation funds, sovereign wealth funds and central banks, as well as consultants. 

Positioning for Inflation 

With upward pressure on interest rates and higher inflation, investors will face a generally more challenging environment going forward, Nuveen notes. Here, the survey found 61% of investors say they are taking steps to increase inflation risk mitigation over the next 12 months.

With traditional fixed income assets no longer producing “robust income,” three-quarters of investors say they plan to expand their reach for yield over the next two years. Two-thirds (62%) are looking to alternative credit, the survey found. Private credit saw the biggest year-over-year increase in the percent of asset owners who hold the asset class. Now, 72% hold private credit, compared with 62% in 2020, and 31% say they plan to increase assets over the next two years, according to the findings. 

“An environment of low, yet rising interest rates and high inflation can make middle-market loans, infrastructure debt, real estate debt and other forms of private credit particularly attractive,” says Perry. 

On the geopolitical front, the firm doesn’t believe that the Russia/Ukraine conflict should be driving long-term portfolio strategy changes. “However, if events in Ukraine continue to escalate and the global security response increases, we expect continued volatility across risk assets,” adds Perry.

ESG Investing

Investing based on environmental, social and governance (ESG) considerations is now a mainstream practice, Nuveen’s findings suggest. The vast majority of asset owners (87%) say they consider ESG factors when making investment decisions or plan to within the next year. Reputational risk and “doing good while investing well” are the top motivations for ESG, with both at approximately 50%, while one in three of those surveyed cite stakeholder pressure as a driver.

“Data quality remains a barrier to more effective ESG integration,” notes Amy O’Brien, Global Head of Responsible Investing. “But regulatory changes and ongoing enhancement of the precision, consistency and transparency of ESG data—as well as more structure around properly mapping ESG to material factors in a company’s performance—should continue to propel further ESG integration,” she adds. 

Nuveen also found that climate risk (50%) along with investment management technology (51%) top the list of the emerging trends that investors believe will be most influential to their portfolios over the next five years. Investors now generally agree (71%) that climate risk is, in fact, investment risk, the firm notes. Moreover, 79% also agree that the transition to a low-carbon economy is inevitable and 86% say the transition will present new investment opportunities. 

Momentum also apparently is building for investments designed to have an impact related to social issues and concerns. “For some institutions, this involves adding impact investments that address specific social causes to their portfolios,” O’Brien explains. “For others, it means incorporating practices for diversity, equity and inclusion into how they build their internal teams or select outside managers.”

More than half (52%) of investors and consultants agree that investors can impact social inequality through investment choices. Half of asset owners (49%) currently invest in social investments or plan to in the next two years. In this case, they are exploring a range of opportunities from community infrastructure projects (43%) and fintech innovations addressing financial inclusion (42%) to investments focused on diversity, equity and inclusion (DEI) efforts (40%) and affordable housing (38%).