The long or even perpetual time horizon for institutional investors is driving them across a range of asset classes, both liquid and illiquid according to the Endowment & Foundation (E&F) Group at J.P. Morgan Asset Management in London.
Recent trends observed from endowments and foundations in private equity included the fact at it is an asset class that has gained acceptance as part of a broader asset allocation over many years where the allocation acts to enhance returns rather than as a diversifier. The trend the group is seeing is the need to diversify globally and across buy-out, growth, venture and secondaries.
Private credit is being considered as an attractive way to harvest the illiquidity premium and for investors to capitalise on the disintermediation of banks in providing direct loans to corporates, the group found. This growing trend towards private capital being used to lend across the capital structures to corporates favours E&F investors with a long time horizon, the group found.
They reported that hedge funds have historically been used as a lowly correlated portfolio diversifier that can provide downside protection in difficult market conditions and decent risk adjusted returns over time. “Today, clients with long time horizons are shifting their priorities in favour of higher potential returns combined with more modest levels of diversification” the group found.
Real estate and infrastructure also featured. The E&F Group found that: “With a growing range of real asset strategies available to investors—and a wide range of risk—return characteristics— real estate typically represents a cornerstone of European Endowments and Foundations allocations, given its steady income potential, lower-volatility returns, and diversification versus other parts of the investment portfolio. Meanwhile, there is growing interest in adding core infrastructure to further strengthen diversification and provide downside resilience.”
Kris Jonsson, Head of EMEA Endowments & Foundations at J.P. Morgan Asset Management says: “A typical endowment needs to generate annual return greater than the sum of inflation and distributions, in order to preserve the portfolio value in real terms. With the current low yield environment, E&Fs are reviewing their strategic asset allocations and considering alternatives – which have historically both improved diversification and can enhance returns.”
Sandeep Bhamra, Client Advisor in the Endowments & Foundation Group at J.P. Morgan Asset Management says: “The long-term investment horizon of these endowed foundations mean they are capable of absorbing market volatility and illiquidity in the pursuit of total return; therefore illiquid assets with an associated premium are particularly attractive to them. Alternative investments are especially being considered at a time when equity markets are at all-time highs and fixed income investors are predicting the end of an unprecedented bull run.