Large asset owners remain confident that their portfolios are well positioned to withstand a range of shocks over the coming year. But there is an increase in perceived vulnerability to several key risks over both the coming 12 months and the next three to five years, according to a recent survey of large asset owners by Mercer Investments. Among the issues they consider themselves vulnerable to, threats from geopolitics and regulation are front of mind.
Trends:
- Artificial intelligence (AI) is considered to be the definitive long-term factor set to shape the macro environment over the next five to 10 years, yet the majority of large asset owners have not implemented or developed an AI/ generative AI policy. Only half of respondents expect to do so over the next three years.
- However, this group of investors has taken proactive steps over the past year to protect portfolios from inflation and liquidity risks while adjusting their geographic asset exposures.
- With most large asset owners confident that their portfolios are resilient to a private market valuation evolution, nearly half of respondents increased their allocations to private markets in the past 12 months. This shows little sign of stopping in the year ahead, with investors planning to increase allocations to private debt, private equity and infrastructure, all of which offer strong potential diversification benefits. This momentum is particularly notable among the largest asset owners — those with more than $20 billion in assets under management (AUM).
- Conversely, the outlook for public markets among investors is mixed. Confidence in UK equities remains low, while large asset owners are divided on US equities. A significant proportion of participants are seeking either to increase or decrease their allocations over the next 12 months.
- While large asset owners are still more likely to increase rather than decrease their allocations to sustainability funds, the overall momentum has fallen compared to the previous year. Moreover, there are signs of a step back from certain aspects of sustainability, with a sharp rise in the number of large asset owners that are not planning to set netzero targets.
“The clear direction of travel is toward greater allocation into private markets and for these investments to be managed by third-party specialists,” according to the survey.