Real assets, alternatives to lead institutional allocations as cash holdings fall

Global institutional investors are expected to show their interest in infrastructure by increasing real asset allocations in 2014, research shows.

Analysis by asset manager BlackRock found that two-fifths of investors recently surveyed expect allocations in real assets to increase this year.

The results complement findings from ratings agency Standards & Poor’s (S&P) and consultant McKinsey & Co that investors could be in line to make up a $200bn (€148bn) shortfall in infrastructure.

The shortfall represents investment across Europe, the US and China.

In S&P’s report ‘Global Infrastructure: How to Fill a $500bn Hole’, the agency highlights a base case scenario of governments around the world leaving a large infrastructure spending gap.

With banks expected to cover around $300bn of infrastructure lending per year, particularly in Europe where they still significantly contribute, institutions may make up the rest.

A weighted average allocation of 4% from global institutions would cover this. However, S&P said recent data and statements from investors indicated a much higher allocation.

“Investors are targeting an allocation of 3-8% of their assets under management over the next five years – a significant increase from what we’ve traditionally seen,” the report said.

“This could equate to as much as $3.2trn in new money earmarked for an asset class that is showing steady upward growth. About 40% of this would come from the pension fund sector.”

BlackRock’s findings also showed significant interest in real estate, with 49% of investors surveyed expecting to increase allocations this year, with one-third reducing allocations to cash.

Robert Goldstein, head of BlackRock’s institutional client business, said economic and geopolitical conditions offered institutions real asset opportunities.

“We anticipate institutions looking for income-producing alternatives will turn their attention to more opportunistic real estate investments,” he said.

“We’re also seeing a growing interest in infrastructure debt.”

Recent findings from investment management firm Brown Brothers Harriman also showed growing interest from institutions in alternatives.

With analysis focusing on the use of European UCITS funds, its report ‘Alternatives en Vogue: Designing the Next Blockbuster Fund’ said alternative funds were serving to reduce fixed income allocations.

The report said the first half of 2013 saw 73% of inflows in Europe were directed into the Top 10 alternative UCITS funds.

It added that the use of alternative investments by institutional investors, especially within the UCITS wrapper, grew more prominent throughout the year, with expectations for continued growth.