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, prompting many institutions to evaluate investment options that help prevent decreases in assets or funded statuses, according to a recent report.
As high inflation (89%) and lower expected investment returns (86%) continue to challenge institutional asset owners, many (44%) of the institutional investors surveyed indicate a desire to increase their allocations to alternative investments, notes the report, North America Institutional Markets 2022: Shifting Allocations Amid Market Uncertainty, published by Cerulli Associates.
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.
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.
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, the report forecasts 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,” says Chris Swansey, Cerulli senior analyst. “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.”