Almost 60 per cent of institutional investors have made or are considering fundamental portfolio makeovers amid a confluence of geopolitical and market disruptions, according to a survey by US$1.2 trillion manager, Nuveen.
The third annual Nuveen ‘EQuilibrium’ global poll of some 800 large investors found 31 per cent of respondents are exploring significant portfolio changes while 27 per cent have already made some strategic alterations: a further 1 per cent are “hitting the reset button”.
In a statement, Mike Perry, Nuveen global client group head, said the widespread investor appetite for radical portfolio repositioning marks a big departure for the historically conservative sector.
“Institutional investors typically take a measured, incremental approach to portfolio changes,” Perry said. “That makes the degree to which investors today are contemplating or making very significant changes even more striking.”
Almost half of those surveyed plan to amend capital market assumptions, 38 per cent are changing tactical asset allocation parameters while 27 per cent are looking at new strategic asset allocations.
But the big shift in investor behaviour is underpinned by a series of unfortunate events (war, inflation and novel risks such as climate change), which have taken the majority of respondents into unfamiliar territory.
More than half (56 per cent) of those surveyed admitted that the “current environment is unlike any they’ve seen in their careers”, the Nuveen report says.
For example, in the wake of the Ukraine war geopolitical tensions have emerged as an important investment risk factor for the first time in more than three decades.
And, of course, the resurgence of inflation has prompted an investor scramble for portfolio protection, the survey found.
“Nearly two-thirds of investors are planning to increase their inflation-mitigation efforts in their portfolios in 2023. The majority of investors are expanding their search for yield, with 47% revisiting traditional and/or opportunistic fixed income and 41% looking at alternative credit,” the report says.
“In addition to these near-term responses, investors are also looking to significantly increase their strategic allocations to private markets and infrastructure to reduce portfolio volatility, hedge against inflation and capitalize on emerging opportunities to generate alpha.”
Roughly two-thirds of respondents expect inflation problems to persist for two or more years: 50 per cent have penciled in “inflation mitigation” strategies for the next two to three years while 10 per cent target a four-to-five-year range and 4 per cent see the issue persisting for more than five years.
As well as coping with the macro-economic regime change, institutional investors are also adapting to new risk factors such as climate change, the report says. Over 80 per cent of respondents either already account for climate risks or intend to.
“Of investors considering or planning to consider climate risk, two in three (67%) say climate risk is a key factor in risk management today more so than five years ago. Forty-four percent say they report on climate risks and metrics; 38% say they are still exploring how to build a reporting framework,” the Nuveen study says. “Only 16% say they do not report on climate risk to stakeholders or regulators.”
About three-quarters of those surveyed also measure, or plan to consider, the environmental and social impact of investment decisions.
Australia-founded research firm, CoreData, carried the survey on behalf of Nuveen late last year, tapping the opinions of “800 global institutional investors in 29 countries across North America, Europe, the Middle East and the Asia Pacific”.