Large asset owners cutting U.S. equities – Mercer

Large asset owners have already trimmed or plan to reduce their exposure to U.S. equities, since they have now reached stretched valuations, according to consultant Mercer's inaugural 2024 Large Asset Owner Barometer, a report released Oct. 12.

However, the survey, which polled 60 asset owners around the world with more than $2 trillion in combined assets, also found that large asset owners are confident about their portfolios' resilience despite market volatility. They believe their portfolios are well positioned to withstand such shocks as stagflation and geopolitical concerns.

The survey also revealed that more than two-thirds of large asset owners plan to increase their allocation to private markets over the coming year. Half of those surveyed are favoring infrastructure and sustainable strategies despite concerns in some countries around environmental, social and governance investing and the overvaluation of certain private market asset classes.

Although large asset owners are seeking to hike their allocations to private markets, they are concerned about how to navigate in this asset class, citing such issues as their complexity and illiquidity, Mercer's survey found.

Moreover, only 18% of large asset owners currently manage private market investments in-house, with the majority choosing to outsource management of this resource-intensive asset class.

"Large asset owners have a clear understanding of what they do well in-house and where they benefit from external expertise," said Rich Nuzum, executive director, investments and global chief investment strategist at Mercer, in the report.

"Nearly half (41%) of large asset owners surveyed say they prefer to outsource investment management entirely. With large asset owners planning to add to their positions in private equity, private debt and infrastructure in the next year, the trend towards outsourcing could accelerate," the report said.

Aside from U.S. equities, large asset owners are also cautious about U.K. equities and global real estate and consequently seek to decrease their exposures to these asset classes in the coming year.

In addition, about half (50%) of large asset owners plan to increase their allocation to sustainable investment strategies, with 8% prepared to "significantly increase" these allocations.

But large asset owners are generally in the early stages of setting climate targets. While 55% of large asset owners have set climate transition targets, only 29% have actually implemented such goals.

About 47% of the large asset owners surveyed have set a 2050 net-zero target, while 5% that have set a 2030 target.

The report surveyed large asset owners that each had at least $5 billion in assets as of July 30 via an online survey between May 2 and July 30.