Heading into 2016, institutional investors already faced a formidable list of issues and matters, which included:
- A low-yield economic environment
- Slow growth
- Global economic volatility
- Various environmental and socio-political crises
- Election seasons
- Increased regulation and fraud enforcement
Institutional investor strategies have had to account for these somewhat unusual factors in creative and innovative ways. The following are recent trends associated with institutional investors:
Value-Added Strategies
Many institutional investors have demonstrated a shift towards value-added strategies. These involve a repositioning and repurposing of assets in order to yield additional value from the investment activity. While often utilized by smaller institutional investors, many see this as an ideal strategy because it can increase net operating incomes and provide some insulation from risk. Value-added strategies can provide more hands-on control of the assets, and they can also work well in cases where the investor works with a fund manager. This also fits in with the larger trend of alternative investment strategies to buffer risk.
Climate-Sensitive Policies
More and more institutional investors are coming face to face with ESG sustainability factors when making important decisions. As we’ve seen in the past, considerations of climate-related policies, fossil-fuel divestment, and seeking alternative investment sources are a top priority for institutional investors and large pension funds. The question of long-term sustainability is now considered to be a main ESG investment reporting metric. This represents a major paradigm shift in corporate governance.
On the other hand, investors do need to consider possible negative consequences and losses linked to disassociating immediately from industries with large carbon footprints. Balancing the interests of all parties involved is key when transitioning to newer policies.
Risk Avoidance and Volatility Management
In many respects, this could not have been a more volatile, risk-filled year so far. A prime example of this was the entire Brexit situation, which dominated discussions early this year and continues to send ripple effects across the global market. In managing volatility, institutional investors are now seeking more investment alternatives to provide more stable growth and returns.
For many investors, “thinking outside the box” has actually meant a return to more basic, fundamental portfolio construction principles. This includes a greater diversification of assets, less “alpha-chasing,” greater risk research, and more in-depth use of technology to consider more risk factors.
Investment Outsourcing
Investment outsourcing has been a growing trend in recent years. Many pension funds have been increasingly relying on third-party fund managers to handle investments, especially in alternative assets. This is mostly done in the interest of cutting costs, although sometimes it is needed if special skills or resources are required for a project.
However, some pension funds are now returning more investments to in-house management. While costs may be affected, this does provide the funds with greater control and input with regards to those assets. Also, legal issues such as transparency and breaches of fiduciary duty may be frequent as the focus shifts to more competent in-house management.
Most importantly, it is crucial for institutional investors to consider how these factors interact and converge with one another, and how they interact with possible legal issues or disputes. For instance, the focus on climate-focused policies emphasizes a greater need for disclosure and transparency at all company levels.
All of these factors and trends are interacting, and in order to stay ahead of the curve, investors need to be able to see these elements in a dynamic, responsive manner. If you have any questions regarding institutional investment trends and factors, contact us at Kessler Topaz. Our team of attorneys is committed to helping investors find workable strategies. We also strive to identify marketplace events in order to assess potential legal claims and help protect assets.