Investors eye alternatives amid equities caution

Infrastructure is among the asset classes set to benefit as views on prospects for equities become more skeptical.

Investors worldwide are increasing their allocations to alternative investments to compensate for faltering performance in the equities markets, according to research from Sydney-based fund manager AMP Capital. The shift in emphasis comes after investors enjoyed strong returns from equities in 2013.

In AMP Capital’s latest Institutional Investor Report, almost a quarter of participants are expected to increase investment in direct infrastructure this coming year, putting it third among most-favoured alternative assets behind direct real estate (36 percent) and private equity (45 percent).

The emphasis on alternatives may seem odd given bullish equity markets last year, the study noted. However, AMP’s survey found that investors did not expect the positive market sentiment to continue, and have in fact decreased their return forecasts for next year in the face of global market uncertainties.

Of AMP’s 58 institutional investor respondents, which collectively manage $2.4 trillion globally, approximately 93 percent either met or exceeded their return expectations in 2013. Portfolios returned 13 percent on average last year but, in the face of global economic and political uncertainties, investors have downgraded their return expectations to 7.3 percent on average for the rest of 2014.

“Institutional investors enjoyed a stellar year in 2013 largely due to the bull market in equities around the world,” said AMP Capital international chief executive and head of global clients Anthony Fasso. However, “looking ahead, investors have uncertain expectations”.

“Their concerns are based around the risks they see to the global economy including the ongoing crisis in Ukraine, the end of quantitative easing by central banks and questions over the future direction of China’s economy,” he explained. Consequently, “investors’ planned allocation increases for the rest of 2014 are most pronounced in alternative assets especially in private equity and direct real estate and infrastructure”.

The expected allocation increases to private equity, infrastructure and real estate continue a trend reported in earlier issues of the AMP Capital Institutional Investor Research Report series.

In May and October last year, AMP surveys highlighted that a net 21 percent, then 18 percent, of respondents were planning augmenting allocations to direct infrastructure.

While infrastructure is still a relatively minor investment choice for institutional investors, representing only 2 percent of all asset class allocations chosen by respondents on 31 December 2013, the trend is expected to persist with 19 percent of respondents opting for allocation increases in listed infrastructure and 24 percent in direct infrastructure.

At the end of 2013, direct infrastructure was most popular among public pensions, with a 3 percent allocation, followed by private pensions and sovereign wealth funds (2 percent) and then insurance companies, family offices, endowments, and foundations, all with a 1 percent allocation.

At the other end of the spectrum however, domestic equity and domestic fixed income markets are likely to suffer significant withdrawals with 31 percent of respondents across Asia Pacific, Europe and the Middle East, and the Americas, indicating they would move out of domestic equities and 21 percent intending to reduce the domestic fixed income portion of their portfolio.

Cash allocations are also expected to be reduced by 21 percent of respondents.