Institutional investors expect to increase allocations to active and “non-traditional” passive strategies such as smart beta over the next six years and decrease allocations to traditional passive strategies, a report from Fidelity Institutional Asset Management shows.
Among the 905 institutional investors representing $29 trillion in assets under management surveyed in summer 2018, about 41% of institutions with over $1 billion in AUM said they plan to increase allocations to active strategies through 2025, while 25% of that population plans to increase allocations to non-traditional passive strategies such as factor-based, non-capitalization-weighted and other smart-beta strategies. Meanwhile, 42% plan to decrease allocations to traditional passive strategies.
The top concern among institutional investors polled, at 21%, was a low-return environment, followed by 17% that said volatility was a top concern.
“Institutions realize that in the long-term, market activity may no longer be enough to generate returns, so they have to work smarter to reach their goals,” said Jeff Mitchell, chief investment officer, Fidelity Institutional Asset Management, in a news release. “Institutions are restructuring their portfolios to reflect this changing investment ecosystem, whether by increasing allocations to certain investment styles or asset classes, or embracing new investment strategies.”
The survey also showed that smaller institutions currently have larger allocations to active strategies than their larger brethren, but smaller allocations to non-traditional passive approaches. Investors with fewer than $1 billion in assets, for example, showed a 58% allocation to active strategies, 35% to traditional passive and 7% to non-traditional passive, investors with $1 billion to $10 billion had 39% active, 33% traditional passive and 28% non-traditional passive and investors with $10 billion to $50 billion were 42% active, 31% traditional passive and 26% non-traditional passive.
Larger institutions also tend to have greater allocations to private equity, real estate and infrastructure than smaller institutions, which have greater allocations than larger institutions in public equities because of the lack of resources available to manage private investments. However, when asked which asset classes to which they anticipate allocating more through 2025, 28% of institutions with $1 billion to $10 billion in AUM said they would increase private equity, 18% said infrastructure and 13% said real estate.
The Fidelity Global Institutional Investment Survey was originally released in October 2018, and the money manager released additional data from the survey in March. The survey respondents included decision-makers from corporate and public pension funds, insurance companies, endowments, defined contribution plans and sovereign wealth funds from 25 countries.