Inflationary Pressures Drive U.S. Institutional Investors to Alternative Investments
December 8, 2022 — Boston
Opportunity exists for asset managers with strong performance in alternative investments, particularly infrastructure and real estate investments
As high inflation (89%) and lower expected investment returns (86%) continue to challenge institutional asset owners, many (44%) indicate a desire to increase their allocations to alternative investments, according to Cerulli’s latest report, North America Institutional Markets 2022: Shifting Allocations Amid Market Uncertainty.Among alternative investment allocations, asset owners plan to allocate to infrastructure (28%) and real estate investments (26%), given their ability to hedge against inflation in the next 24 months. Asset owners also indicate an increase to private equity (20%), private debt (20%), and hedge funds (18%) to bolster returns. “Institutional investors are operating in a significantly different market environment in 2022 than they had been over the last several years as a result of persistent inflation. Many institutions are evaluating investment options that help prevent decreases in assets or funded statuses,” remarks Chris Swansey, senior analyst.
In addition to shifting allocations, the research points to an increase in consultant intermediation among institutional mandates—35% of institutional investors plan to increase their use of an investment consultant in the next 24 months. “Many plans are looking for guidance in navigating a turbulent market as inflation, rising interest rates, and lower capital market expectations translate to falling asset values and higher future liabilities,” says Swansey. Public defined benefit (DB) plans lead all institutional investor channels in the proportion of investors that expect to begin using an investment consultant (33%).
When hiring an asset manager for alternative asset class mandates, specialization in a specific asset class (96%), strong performance (94%), and competitive fees (92%) are important factors, according to the research. Looking forward, Cerulli believes that managers are likely to see increased pressure on fees—almost all institutional asset owners (94%) negotiate management fees and a majority are doing so on a mandate-by-mandate basis during the sales process. “It is clear that most institutional asset owners are looking for discounts on management fees below the stated fee schedule. Lower market returns will likely increase pressure on management fees, and asset managers that can keep fees competitive and meet investors’ needs for performance and specialization will win out,” states Swansey.
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Note to editors
These findings and more are from The Cerulli Report—North America Institutional Markets 2022: Shifting Allocations Amid Market Uncertainty.