Magazine

UpFront | Published in March 2016

Holding Steadfast

Institutions increasingly embrace illiquid assets

By John Manganaro | March 2016
Art by Michela Buttignol
New data shared with PLANSPONSOR by BlackRock reveals the investment outlooks of 170 of the firm’s largest clients, representing some $6.6 trillion in combined assets. BlackRock says these large institutional investors widely expect to embrace active management this year to combat macro-economic trends, anticipated market volatility and divergent monetary policy.

Further, the data shows institutions increasingly embrace illiquid assets, including private credit and real assets, as a way to meet their long-dated liabilities. Mark McCombe, senior managing director and global head of BlackRock’s institutional client business in New York City, suggests that institutional investors are “attempting to look past the current market environment and find alpha-generating opportunities that match their liabilities.”

When considering the recent volatility, BlackRock finds that the sector seeing the largest growth in investor interest has been long-dated illiquid strategies, led by private credit strategies, with more than half of institutional investors indicating an increased allocation in this area. Private credit strategies are “closely followed by real assets (53% increase/4% decrease/+49% net), real estate (47% increase/9% decrease/+38% net) and private equity (39% increase/9% decrease/+30% net),” BlackRock finds, adding that, despite the muted return by hedge funds in 2015, allocations to the strategy remain fairly steady globally.

Taking all this together, clients are clearly expressing demand for the potential return premium offered by illiquid assets, BlackRock says. Specific to U.S. and Canadian institutions, the shift toward such investments is occurring as institutions slightly reduce their allocations in equities. When asked how they plan to manage their modestly scaled-back equity exposures, 25% of respondents said they plan to up their allocations to active managers, compared with 16% who are looking to increase index-based allocations, the data shows. Institutions also anticipate modest reductions within fixed income, “with the majority of that ... coming from their core allocations.”

Bill Finnegan, chief marketing officer for active investment provider AMG Funds in Greenwich, Connecticut, warns institutional and individual investors that embracing active investments requires some real conviction. While many active funds take more active trading positions in the short term, they are not necessarily to be thought of as short-term instruments. This is especially true with illiquid products.

According to Finnegan, “When an investor reacts to volatility and actively trades in and out of active positions, this is essentially attempting to actively manage an active manager.”

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