Institutional Investors: PART 1- Overview of Products and Solutions
Institutional investors' decisions and interest in products are shaped by a focus on growth and potential, world events that introduce new risks (such as global warming), data analytics (which, when used effectively, can reduce risk in decision-making), diversified asset allocation, and effective asset management.
Below you will find a deep dive of our research.
How does asset allocation and management affect their interest in products and/or solutions?
Asset allocation management and their consequent interest in products and/or solutions are primarily determined by key trends in asset class. For example, in the "Global Alternatives Survey 2016," published by Willis Towers Watson, assets demonstrating upwards class trends appear to be hedge funds, real estate, illiquid credit, and insurance-linked investments, hence the interest that institutional investors demonstrate in them.
Additionally, institutional investors focus primarily on growth and preservation, according to a report by Fidelity Insitutional Asset Management. Their report states that decisions involve, "Both qualitative and quantitative inputs. In today's low-return, high-volatility environment, quantitative inputs... may need to take on more importance."
What role do alternatives play for institutional investors?
According to a report published by PGIM Institutional Advisory and Solutions on "The Role of Alternatives in Asset Allocation," the main reason why alternatives are seen as "positive" for institutional investors is due to the fact that they provide good returns ("Through strong manager selections and reallocation from traditional assets to alternatives, Swensen successfully generated outsized returns") and diversification ("[Alternatives] improve diversification and lower drawdown risk."). Though alternatives do have drawbacks (such as underperformance), they're outweighed by the positives and can be used/tailored to provide impressive returns ("Core real estate, value-add real estate, and opportunistic real estate, as well as leveraged buyout private equity, has the highest alpha among the strategies studied."). The study asserts that "Alternatives are far from homogeneous," allowing institutional investors to pick and choose what strategies suit them and that ultimately they would, "Encourage investors to consider the factors most relevant to their own manager universe... [to] properly address the role of alternatives in the context of their total portfolio."
What Effects have data analytics had in the industry?
The main impacts that data analytics have had in the industry are primarily along the lines of developing asset strategies, as evidenced by a study done by Quantitative Management Associates and their article on "Implementing a Real Asset Strategy." Data analysis techniques and studies have allowed them to publish insights into investing, such as quantifying the benefits of investing in real assets ("Real assets... can play multiple roles in a diversified portfolio- including total return potential, diversification from low correlations, and inflation sensitivity."). Additionally, data analysis provides investors with additional tools in deciding how to invest- both where (depending on the objective) and how much (ideally, "5-20% of the overall portfolio").
But even so, data analytics have had varying effects, "With some institutions benefiting substantially while others are failing to gain any advantage." Many organizations feel they are not using data as effectively as they could, largely due to the large volume of data and "Few established best practices," and institutional investors' main goals with data analytics are in, "Improving investment decisions, managing risks, and modeling or otherwise assessing risks."
Do world events affect institutional investor's search of products and solutions? How?
World events, such as global warming and the Paris climate agreement, affect institutional investors' decisions due to the fact that, "[Investors] need to note that
governments have committed to acting on climate change... Taken together, this means that their investments may be exposed to a risk that needs to be managed and potentially profited from." An example of this can be seen in Willis Towers Watson's "Global Investment Matters 2016," stating that, "Holdings of fossil fuel companies will at some stage represent the economy of the past, so the need to review them is clear." Ultimately the goal for investors and companies in addressing world events should be to not turn into a stranded asset and to, in the case of climate change, "Manage their exposure to climate change... This improves [the investors'] resilience to climate impacts, reduces the likelihood that they become a stranded asset and potentially [opening] up new commercial opportunities."
To conclude, institutional investors' decisions and interest in products are shaped by a focus on growth and potential, world events that introduce new risks (such as global warming), data analytics (which, when used effectively, can reduce risk in decision-making), diversified asset allocation, and effective asset management. Investors are looking for products primarily providing diversity, lower risks, and good returns.