Institutional investors are searching for diversification, income generation and also defensiveness in their asset selection, as they strive to build resilient portfolios to suit a world defined by fragmentation and flux, a survey from asset manager Schroders explains.
Given the current macro-economic and geopolitical backdrop, institutional investors are rethinking their allocation strategies and searching out true sources of diversified income, with relatively uncorrelated assets such as catastrophe bonds and insurance-linked securities (ILS) benefiting from increased investor attention as a result.
As we explained before when reporting on a KKR report, the traditional 60/40 stock and bond portfolio split is being reimagined, given the macro-backdrop and as a result alternative asset classes and diversifiers are once again coming into focus for many institutional allocators.
In a recent survey of institutional investors, such as pension funds, insurance companies, single family offices, endowments and foundations, official institutions, and wealth gatekeepers, Schroders reports on how these allocators are adapting their strategies at this time.
The survey received 995 responses, from institutions across 19 locations worldwide that between them represent a significant US $67 trillion in assets under management.
Johanna Kyrklund, Group Chief Investment Officer at Schroders, made the following observations, “Resilience now tops the investment agenda, as the rising tide no longer lifts all boats. In this environment, active strategies provide the control investors need to manage complexity, create portfolio resilience and seize opportunities.”
“Return generation remains a high priority but it is evolving. Investors are embracing active global equity strategies while also accessing specialist areas such as private equity and private debt and credit alternatives. The goal is to build diversified engines of return that can avoid concentration risks and offer exposure to long-term growth themes.
“This is also evident in the reshaping of income strategies. Investors are broadening their toolkit, blending government bond exposures with private debt and credit alternatives as well as high dividend-yield equities.
“What ties all these insights together is a shift toward diversified approaches that can navigate the complexity of the modern investment landscape.”
Michelle Russell-Dowe, Co-Head, Private Debt and Credit Alternatives, Schroders Capital, further stated, “In an environment defined by uncertainty, inefficiency and volatile risk premiums, the ability to select well-collateralised debt, backed by strong borrowers and robust security packages, is a significant advantage of private debt and alternative credit markets. The ability to access diversifying and flexible income through the wide universe of securitised and asset-backed finance, defensive income through real asset debt, and uncorrelated income through insurance-linked securities, provides a valuable extension of the fixed income toolkit for investors.”
For our readers, with a focus on insurance-linked securities (ILS) such as catastrophe bonds and other reinsurance instruments, the most interesting fact from the survey responses is that ILS as an asset class features as a tool institutional investors are looking to for “a reinvention of the income engine.”
Schroders explains that the survey results. “confirm that income generation is evolving—blending traditional tools with modern solutions to create flexible, resilient portfolios that meet today’s complex market demands. From private credit underwriting to active bond selection, generating resilient income today requires a nuanced approach.”
The survey asked respondents: Where do you see the best opportunities for risk-adjusted income yield in the current market?
Insurance-linked securities came in fifth, with 37% of respondents highlighting the ILS asset class, while 36% of institutional investors cited ILS and 37% of wealth gatekeepers (private banks, advisors, wealth managers and other asset managers).
Overall, the survey found that 40% of respondents are looking to private debt and credit alternatives as asset classes where the best return opportunities can be sourced, which is the bucket cat bonds and ILS most typically sit in under Schroders classification.
“These assets are now being seen as a core component to building resilient, diversified return engines,” the asset manager explained.
The results of the survey are a further signal for rising investor interest in catastrophe bonds, insurance-linked securities (ILS) and other reinsurance-linked assets, underscoring the fact the asset class is set to benefit from this with at least some of this interest set to turn into inflows.
