While it is true that private markets have seen large inflows of capital in recent years, it is equally true that skilled managers can still derive value from the asset class, in particular by combining illiquidity and complexity premiums with the potential benefits deriving from direct asset management.
This is the opinion of European institutional investors, who expressed their views on this and other investment topics within the international research "Mercer Asset Allocation Survey 2017", which analyzes the asset allocation trends of large institutional investors, pension funds in particular. Now in its 15th edition, the survey involved 1.241 European institutional portfolios, representing 13 countries, for a total of over 1.100 billion euro of assets.
A great deal of evidence emerged from the analysis and all denote a strong attention from investors to alternative forms of investment and non-traditional risk factors: on the one hand, the perception that simple exposure to the market (market Beta) will offer decidedly lower returns than in the recent past; on the other, the awareness that ESG (Environmental, Social and Governance) issues will represent increasingly critical elements in the choices of long-term investors, especially in light of the impact on financial performance. Even if, on climate change, the position of European institutional investors still remains "glacial" to the extent that only 5% of the sample considers the risks associated with the impacts of climate change on portfolios.
The contribution provided this year by Italy is important, accounting for more than 5% of the total sample, after the UK, Germany, Denmark, the Netherlands thanks to its participation in the Survey of the main institutional investors for a total value of €70 billion. The sample included pension funds (both contracted and pre-existing, with a weight equal to 18% of the sample), banks (with a weight equal to 62%) and foundations (with a weight equal to 20%).
Within the Italian segment Mercer also investigated - through a set of qualitative questions - the prospective attitude with respect to the construction of portfolios. Differently from 2016, the expectation of an increase in inflation during 2017 is common to all Italian institutions in the sample; last year, however, only 14% expected an increase over the course of the year. In particular, for 22% the price increase will mainly concern the USA; for the remaining 78% this increase will also involve Europe. "As regards inflationary prospects - comments Luca De Biasi, Wealth Business Leader of Mercer Italia - the responses of the Italian sample highlight the expectation of a scenario of greater growth on a global scale, with fiscal policies making a comeback stealing space from the monetary stimuli that characterized the post-Financial Crisis years".
It is no coincidence that, faced with a greater risk of inflation, institutional investors look to real assets, which are also interesting by virtue of the role of diversification and de-correlation within the portfolio. In Italy, a strong interest in this asset class is demonstrated by the survey data, with 60% of respondents considering the possibility of investing in the category, against 30% in 2016.
Rising trend also for private markets, which for Italian institutional investors are becoming an increasingly concrete reality in investment decisions. The illiquidity premium, the diversification of sources of return and the low correlation with traditional markets have increased the attractiveness of this asset class compared to last year, with widespread interest in both private equity and private debt.
Also in Italy, in the light of market valuations and improvements in economic fundamentals, Emerging Countries are considered an attractive opportunity for around 70% of institutional investors, against 30% last year. Within this market, the most interesting asset class seems to be bonds.
The Italian market, in terms of strategic asset allocation, is still characterized by an important presence of investments in the real estate market, historically justified (in the top positions together with Finland, Germany, Switzerland), and a bond composition still oriented towards domestic government bonds (understood as Eurozone bonds). The comparison with a more evolved market, basically that of northern Europe, confirms that the weight of investments on the stock market by Italian institutional investors is significantly lower. We like to underline how the Italian sample went from a share market weight of 25% in 2015 to 20% in 2017, just as the bond component went from 52% to 38%.
ESG (Environmental, Social, Governance)
The survey revealed an ever-growing attention to environmental, social and governance (ESG) factors in the investment processes of the participating funds. The key factors motivating institutional investors' attention to ESG issues were financial sustainability, mentioned by 28% of respondents in 2017 (up from 20% in 2016) and reputational risk, mentioned by 20% of respondents (compared to 16% in 2016). According to the Survey, 20% of institutions integrate ESG risks into their investment policies, while 22% of those interviewed have a responsible autonomous investment (RI) policy.
«The attention to the portfolio impacts of ESG factors is a positive development for the market; investors can no longer afford to ignore its financial impacts. Also from the point of view of stewardship (company management) and regulatory activity, the extent of the long-term risks associated with ESG issues and climate change is becoming increasingly clear. In our opinion, the most effective and proactive way to access sustainable investment opportunities is through private markets, which allow access to unlisted companies and projects capable of bringing real benefits in the direction of a sustainable and low-emissions economy» explains De Biasi. «Moreover, climate change and environmental conditions, like social tensions, are among the most relevant risks mentioned in Davos during the 2017 World Economic Forum».
Also on the Italian front there is good news on the ESG issue, since 50% of the sample declares that they consider or want to consider the issues of responsible investments in the investment process, compared to 36% in 2016.
In light of President Donald Trump's recent announcement of his decision to withdraw from the Paris Agreement, while numerous world leaders, as well as many representatives of local government within the United States, have declared their intention to pursue the Paris objectives, De Biasi reflects: "In any case, we believe that a declared transition to a low-carbon economy is inescapable and we continue to recommend that our clients consider the material impacts of climate change in portfolio construction and determination of risk / return parameters".
Concluding remarks
«The Mercer survey - explains Marco Valerio Morelli, CEO of Mercer Italia - can be considered one of the most representative sources of information on the choices of institutional investors, due to the value of the comparison and the pan-European dimension. For this reason I am very pleased to note - continues Morelli - the numerical growth and the relevance of underlying assets of the Italian participation in the sample as well as the increase in attention to ESG issues, which reaches 70 billion between pension funds, foundations and social security funds".
"We find that awareness of the role of institutional investors in the economy of a mature country is increasingly widespread, even in Italy," adds Morelli. «A systemic and long-term approach to investment, such as the typical one for these subjects, allows them both to adopt an anti-cyclical perspective with respect to the market, structurally based on a long-term perspective» concludes Morelli.
"We must therefore sum up that our investors are increasing stakes in real asset investments in Italy (both due to the interesting risk/return profile and the role that institutional investors can play in supporting growth), just as they are increasing their strategies on private markets, which often have attractive illiquidity premiums, and allow for full benefit of specific opportunities, while requiring a greater sophistication profile and a desirable increase in skills and governance in the Boards of Directors and Investment Committees" concludes Marco Valerio More lli.
Attachments: Mercer Asset Allocation Survey
