Diversification, lower volatility driving institutional investors to private assets

Almost one-third (32%) of U.S. institutional investors seek to boost their allocations to private assets over the next two years, according to the U.S. segment of Schroders' Annual Institutional Investor Study released on Oct. 18.

The move to private assets will be driven primarily by the attendant diversification benefits, lower volatility and the potential to generate higher returns than the public markets. Of this group, 42% plan to raise their allocation in infrastructure investments over the next 12 months, making it the most popular pick within this asset class.

"Amid continued volatility and geopolitical uncertainty, investors are looking for opportunities for diversification and returns that align with trends shaping global markets," said Nick Thompson, head of private asset sales-North America at Schroders, in a release issued with the survey. "Private assets investing can allow them access to companies and industries at the forefront of major developments, such as the energy transition and technological innovation. Asset classes like private equity and infrastructure investing can offer both high returns and sustainable opportunities."

The study also revealed that about three-fourths (74%) of respondents said one of the primary reasons for investing in sustainability and impact strategies was that doing so would result in generating long-term financial returns. Two-thirds (66%) said these kinds of investments will help them to diversify into new sectors.

"As the world grapples with regime shift and the trends of deglobalization, decarbonization and demographics on the investment landscape, sustainability themes are becoming increasingly important, creating new opportunities for companies and investments that provide sustainable products and services," said Marina Severinovsky, head of sustainability-North America at Schroders. "As a result, investors are looking to identify and allocate capital to these emerging sustainable investment themes. They recognize that they have the opportunity to drive change on real issues that can simultaneously lead to positive portfolio outcomes, which is apparent in investors' current appetite for thematic investing."

Over the coming year, geopolitical uncertainty (54% of respondents), tapering of monetary policy (45%), and rising inflation (44%), ranked as the respondents' biggest macroeconomic concerns that would impact their portfolios.

The U.S. part of Schroder's survey comprised 117 institutional investors overseeing more than $12 trillion in assets. The survey was conducted in May and June.

Schroders had $923.1 billion assets under management as of June 30.