Seventy-four percent of respondents who don’t already hold alternative investments in their portfolios intend to stay away from the asset class, but interestingly, 70% of investors who already hold alternative investments are planning additional acquisitions within the year. According to the survey, 66% of institutional investors who are investing in absolute return funds use consultants to help them place their capital. With 68% of investors surveyed stating that they are critical of their in-house research capabilities and know-how of alternative investment management, it is unsurprising that they would hire investment consultants in order to gain the advantages of consultants’ networks of contacts and access to high return investments.
Perhaps the most interesting statistic is that 59% of German institutional investors confirmed that they consider UCITS compliance as an important criterion for allocating capital to absolute return funds. This is rather surprising considering that the UCITS directive was originally intended for the protection of private investors. However, 63% of respondents said that lack of transparency and limited liquidity are reasons why they decide against alternative investments, two issues which UCITS was explicitly created to address.
Objective of the survey
The survey sheds light on the risk behaviour of institutional investors and analyses the attractiveness of alternative investments in view of current risk/return preferences. The survey gives answers to the following important questions:
• Which investment criterion is currently the most important (return, liquidity, security)?
• How do institutional investors evaluate their risk aversion and how high is their risk budget?
• How important is risk management in the investment process?
• Which advantages and disadvantages do alternative investments have?
• How large is the share of alternative investments in the entire portfolio (today/in future)?
• Which alternative investments do companies prefer?
• How much influence do consultants have on the selection process for alternative investments?
• Which are the most important investment criteria when choosing absolute return funds?
Security is the most important investment criterion – investors adverse to risk avoid alternative assets.Security is the most important investment criterion for 62% of participants
Safety issues currently influence the investment decisions of institutional investors. Compared to liquidity (20%) and return (18%), security is by far the most important investment criterion with 62%. Aversion to risk is correspondingly high: 73% of institutional investors describe themselves as very secure or secure investors. Insurance companies are particularly averse to risks (83% are very secure or secure investors), as are charities and churches (81%). As risk aversion becomes less, risk budgets and target returns become significantly higher.
Risk/return preference determines alternative investment rate
The risk/return preference of institutional investors determines the evaluation and selection of alternative investments. Alternative assets take up 9% of the entire portfolio of investors that are comparatively averse to risk. If investors are rather happy to take risks, the rate is 17%, almost twice as high. The average investment rate of 12% is rather low compared with the international market.
Alternative investments are regarded as risky
Security is the most important issue for investors. Alternative investments are regarded as risky. That is one of the main reasons why they are treated with scepticism. Seventy-one percent of professional investors feel that alternative investments are riskier than traditional assets. Exactly this (perceived) risk proves the greatest disadvantage for 84% of institutional investors and is therefore the main reason for deciding against including alternative investments in the portfolio.
Limited transparency/liquidity – too little know-how – neutral market orientation is the greatest advantage
Investors criticise lack of transparency and limited liquidity
Apart from (the perceived) risk, lack of transparency (63%) and limited liquidity (63%) are the reasons why investors decide against alternative investments. Internal/external investment restrictions (52%) and high costs (36%) are other problem factors.
Investors do not have enough research and management know-how
Institutional investors are critical about their own research and management know-how. 68% admit that they lack the required expertise. This, however, is necessary for efficient risk management, and 83% of investors recognise this fact. Outsourcing risk management is one sensible option to increase the rate of alternative investments and to take advantage of this asset class, because, amidst all this reluctance, investors recognise the advantages of alternative investments.
Greatest advantage of alternative investments: low correlation between shares and bonds
Sixty-two percent of investors feel that a neutral market orientation is the greatest advantage of alternative investments. In the eyes of professional investors, (targeted) regular positive returns and at the same time low volatility (58%) provide another argument in favour of alternative investments.
Participants also state above average returns (47%), risk diversification (39%) and – in the case of real estate investments – tax advantages (60%) as additional advantages of alternative investments
Plans for new investments: real estate, commodities, absolute return funds – UCITS is important
Plans for new investments
Professional investors are planning to increase the number of their alternative investments within the next 12 months by an average of 13%. Two opposing groups are forming: pro and con alternative investments. Seventy-four percent of non-investors intend to stay away from this asset class now and in the future. Seventy percent of investors that already hold alternative investments, on the other hand, are planning additional acquisitions within the year.
The favourites are real estate, commodities and absolute return funds
With 48%, real estate is top of the list of planned investments. Investors in alternative assets are most familiar with them. Investors also favour commodities (28%) and absolute return funds (28%). Private equity (19%) and alternative assets (11%) only play a minor role. The majority of participants (61%) rely on specialist consultants for evaluating and selecting alternative investments.
Quality management and UCITS particularly important for absolute return funds
When selecting absolute return funds, investors pay particular attention to the quality of their consultant (66%). Investors hope to gain advantages from the manager’s network of contacts and access to high return investments. It comes as a surprise that the UCITS – originally intended for private investors – is an important criterion for institutional investors. UCITS-compliant absolute return funds must be authorised, monitored by the financial supervisory authorities and thus increase investor protection.
Security is an important criterion for selecting absolute return funds – more transparency/advice is required
Security also an important criterion for absolute return funds
The current trend towards security also shows in the choice of absolute return funds: 53% of institutional investors feel that the funds’ risk management policy is very important. Investors feel that volatility (44%), liquidity (44%) and fund diversification (38%) are also important criteria when selecting investments.
More transparency and advice required
These results show that risk behaviour of institutional investors determines the level of alternative investments. Many investors feel that they provide limited liquidity and lack transparency. UCITS absolute return funds prove that these disadvantages do not apply to all alternative investments. Financial service providers and consultants have a lot of groundwork to do to explain this and other facts to investors. They also have to explain that the known advantages of alternative investments can contribute positively towards a diversified portfolio, even despite their feared risks. Investors with a low-risk investment style, especially those with limited research and management capacities, should be given the opportunity to outsource risk management to experts. This way, it would be easier for institutional investors to realize alternative investments and achieve their goal of generating profits, away from shares and bonds.
For a fully copy of this survey, please contact Julian Bailey at jbailey@kreabgavinanderson.com
