Faced with profound market change, both current and contemplated, institutional investors around the world are taking concerted action to better position their portfolios for the future. This ranges from increasing investments in infrastructure and private assets to better quantifying the risks and opportunities of climate change and making a commitment to impact investments.
“Across the board, global investors are reassessing their views on risk and return, and preparing for a new market regime,” said Simon England-Brammer, head of EMEA and APAC institutional at Nuveen.
Specifically, many institutions are identifying and taking advantage of new opportunities in private markets as well as previously under-utilised sectors.
For example, 62% of asset owners in APAC are planning to increase allocations to private equity and 61% are planning to increase allocations to infrastructure, according to Nuveen’s 3rd annual EQuilibrium Survey1 of 800 global institutional investors.
“Institutional investors typically take a measured, incremental approach to portfolio changes,” added England-Brammer. “That makes the degree to which investors today are contemplating or making very significant changes even more striking.”
Dialling up inflation risk mitigation and private investments
Across the APAC region, most institutions (67%) are dialling up inflation risk mitigation; 64% expect to employ inflation-fighting strategies for two or more years. “The investor consensus is that inflation will continue to be a threat to portfolio returns through at least 2024,” said England-Brammer.
This is especially true in Australia, for example, where 83% of investors are among the most likely to increase inflation risk mitigation. Across the region, 78% of public pensions in APAC say they are likely to implement inflation risk mitigation.
Investors are looking at a variety of assets to help weather inflation. While the top pick was private infrastructure, other popular choices were public equities, commodities, inflation-linked bonds and private real estate.
Private assets and other alternatives are poised for higher allocations. The percentage of investors who plan to increase their allocations to alternatives, and particularly private alternatives, has surged since 2020.
This spans all alternative asset classes, from the largest, most widely held assets to more niche investments. Nearly three-quarters of investors (72%) plan to increase exposure to private markets over the next five years.
Percentage of investors planning to increase alternative allocations over the next two years
Which alternative investments do you plan to increase allocations to in the next two years? (Multiple answers allowed, n - 579)Source: EQuilibrium, 2023, Nuveen
Even with the decline in public market valuations causing portfolio balances to shift more heavily toward private markets, most global investors are planning either a gradual (63%) or significant (8%) increase to private assets over the next five years.
Impact investments aligned with climate strategy goals
At the same time, amid the growing focus on the environment, climate risk management and reporting are in sharper focus among investors when making allocation decisions.
According to the survey, 78% of investors in APAC either consider, or plan to consider, the impact on the environment and society when making investment decisions – slightly higher than the global figure of 74%. And within the APAC group, two-thirds agree that impact investments will be an increasingly important allocation for them in the coming years.
“Impact investing is still a new area for many investors, but as the number and variety of investments expand and the track record gets longer, it’s becoming more and more important, and investors are becoming more knowledgeable and comfortable with the space,” said Amy O’Brien, Nuveen’s global head of responsible investing (RI).
In terms of allocations, since nearly half (48%) of impact-focused investors globally align impact with their climate strategy, the top picks for impact investing were energy innovations (69%) and infrastructure projects (62%). Social investments were also selected, with a third of investors indicating interest in affordable housing. This number was even higher in Australia with 60% of impact-focused investors selecting affordable housing as a current or planned impact investment.
“Allocation to impact investments is an issue of both financial performance and credibility – and we can solve for both of those through more robust and standardised measurement, transparency and reporting,” explained O’Brien.
Driving change with real-world impact
Nuveen’s approach is to pursue positive social and environmental impact alongside competitive financial returns across a broad range of asset classes.
The firm’s RI capabilities reflect this. Out of around US$50 billion in assets allocated to RI-focused strategies, roughly US$7 billion are in publicly traded bond investments with specific social and/or environmental outcomes and about US$10 billion are in impact investment commitments – a quarter of which are in private markets and the rest in the public space.
This creates a range of investment opportunities, all of which aim to contribute to solutions to pursue positive real economy outcomes, invest with intentional, direct and measurable positive results to society and environment, or influence outcomes through stewardship.
Innovation in the impact bond space is a further sign of the momentum behind impact investing among asset owners in APAC. Here, Nuveen sees impact objectives being incorporated into fixed income investment goals.
This has broadened the opportunity set with a diverse array of issuers, tenures and use of proceeds. To support this development, increased regulatory scrutiny and third-party investment frameworks have improved transparency and reporting.
The flow of capital to fund impact solutions is following suit. Among recent examples is the Women’s Livelihood Bonds – a series of bonds launched by Impact Investment Exchange (IIX) in Singapore to fund microfinance institutions and social enterprises that help low-income Southeast Asian women build credit histories. Issued in December 2022, these were the first officially labelled ‘Orange bonds’, based on principles to support gender equality impact securities.
In line with the views of APAC investors, there seems to be ever-greater scope for investing with impact. “Today, there are ample opportunities for investors to generate compelling risk-adjusted absolute and relative returns while financing initiatives that are driving positive environmental and social outcomes,” added O’Brien.
1 - https://www.nuveen.com/global/insights/equilibrium
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