Inflation, market volatility, and lower expected investment returns challenged institutional investors throughout 2022 and early 2023, yet investors remain optimistic, according to The Cerulli Report—North American Institutional Markets 2023: Abundant Opportunities Despite Asset Declines.

In the first half of 2023, there was great uncertainty about whether a recession was imminent. However, 84% of institutional investors expected the economy would avoid a full recession, and many (44%) believed the Federal Reserve would succeed in its attempt at a “soft landing.”

To adjust to an entirely new and unpredictable investment environment, institutional investors (68%) indicated that they would take advantage of higher interest rates and increase their allocations to public fixed-income investments. According to the research, almost three-quarters of institutional investors (70%) expect to increase their allocations to actively managed fixed-income strategies over the next 24 months. “This presents a significant opportunity for asset managers with strong fixed-income capabilities and performance,” says Chris Swansey, senior analyst.

Moreover, a majority (55%) of institutional investors are responding to rising interest rates by increasing their allocations to alternative investments. Private credit strategies have become particularly attractive alternative investments—nearly half (47%) expect to increase their allocation over the next 24 months.

In addition to seeking exposure to public fixed-income and alternative investments, institutional investors are prioritizing several factors beyond investment performance. Asset managers can position themselves to win institutional mandates by charting a clear succession plan (43%), having a well-established investment team (41%), and demonstrating expertise through thought leadership (43%).

“With portfolios designed to enhance returns over the long term, institutional investors are prepared to withstand short-term economic shocks,” says Swansey. “This allows them to be opportunistic during times of market volatility and take advantage of lower-than-normal valuations,” says Swansey. “Managers that offer these exposures and highlight factors beyond investment performance will be well poised for mandate wins in this market,” concludes Swansey.