Mercer’s 2024 Large Asset Owner Barometer seeks to advance discussion and collaboration around the asset allocation decisions, risk management and governance practices of large asset owners.
At a time of significant uncertainty in global markets and in the face of systemic risks — a tightening monetary backdrop and increased focus on climate transition among them — this study convenes the views of 61 large asset owners1, with over $2 trillion in assets under ownership, to share important insights and key learnings based on their current positioning, plans and principal concerns around three key areas of focus. We outline the three areas and key findings from the survey below.
Large asset owners (LAOs) are confident that their portfolios are well positioned to withstand a range of shocks over the coming year. Private markets are playing an increasing role in the diversification of portfolios. Below are some of the highlights from the report:
- LAOs believe their portfolios are overall more resilient than vulnerable to every issue analysed.
- Over the next 12 months, LAOs believe their portfolios are most vulnerable to stagflation (36%), geopolitics (32%) and volatility in public markets (26%). However, almost two thirds believe their portfolios are well positioned to withstand the impact.
- LAOs feel their portfolios are most resilient to FX moves (83%), muted global growth (84%), climate change (84%) and the evolution of private market valuations (80%).
- 79% of LAOs are confident their portfolios are resilient to interest rate changes, with 46% adjusting the duration of fixed income allocations.
- 90% of LAOs have at least some allocation to alternative asset classes, with the most popular including real estate, (82%), private equity (78%), infrastructure (75%), private debt (71%) and hedge funds (55%).
- 39% of LAOs say they will increase their allocation to private credit, while 27% plan to remain consistent with their current weighting.
- 34% of LAOs say they will maintain their current private equity exposure, and 30% plan to increase it.
- Of the small number of respondents who said they did not have an allocation to private markets, complexity around the asset class, not aligning with their liquidity requirements and a lack of confidence that illiquid assets can be fairly valued were the most common reasons cited.
Large asset owners (LAOs) are still in the relatively early stages of setting climate targets, but momentum is building. Below are some of the highlights from the report:
- The majority of LAOs incorporate sustainability into investment practices and have either set, or plan to set, a science-based net zero target by at least 2050, however there is less commitment to nearer term targets and investment issues such as biodiversity and impact investing.
- 63% of LAOs say they have incorporated sustainable investment goals into their investment policies.
- Of the LAOs who incorporate sustainable investment goals into their investment policies, over half (55%) of LAOs have already set transition targets, and a further 11% say that they will do so in the coming 12 months.
- 26% of LAOs plan to set transition targets in the next two years, and only 8% do not plan on setting climate transition targets at all.
- Of the LAOs which do have explicit reference to and/or separate policies that address how they incorporate specific sustainability themes into their process, 87% incorporate climate change, 71% incorporate net zero targets and 53% incorporate policies related to labour practices, health and safety and human rights.
- A far smaller proportion of LAOs consider themes such as impact investing (39%) and biodiversity (16%). Only 29% incorporate DEI into investment objectives and under half (47%) incorporate the UN SDGs.
Large asset owners (LAOs) generally prefer outsourcing investment management. There is also a clear pattern of LAOs choosing to manage less complex asset classes in-house and outsourcing those requiring more specialised investment teams. Below are some of the highlights from the report:
- 41% of LAOs prefer outsourcing investment management entirely.
- The primary reasons for outsourcing include in-house management being too resource intensive (74%), lack of talent and skillsets required to manage investments internally (64%), and the reputational and governance risk of managing assets in house (38%).
- The approach to outsourcing differs between large asset owners based on size. Of the LAOs overseeing more than USD 20 billion, 36% have all of their assets managed externally and of the LAOs overseeing between USD 5-20 billion, 47% have all of their assets managed externally.
- The vast majority of LAOs outsource at least a portion of their portfolio to external managers, and only one in ten (11%) respondents manage over 80% of their portfolio via internal investment teams.
- 82% of respondents outsource the allocation of private market investments.
- Asset classes far more likely to be managed externally on behalf of a large asset owner include emerging market equities (90%), high yield debt (92%), emerging market debt (92%) and hedge funds/absolute return (93%).
- Asset classes most commonly managed by internal teams are government bonds (43%), real assets (33%) and investment grade credit (26%).
Portfolio resistance and managing riskAll consider their portfolios to be resilient in the face of various market risks over both the coming 12 months and the next three to five years and most have taken proactive steps in the past year to protect portfolios from inflation and liquidity risks.
Diversifying through private marketsMost plan to significantly increase allocations to private debt, private equity and infrastructure to help diversify portfolios. There is however concern around US equities, UK equities and real estate, with some pension plans looking to move out of these asset classes in attempt to de-risk.
A path towards sustainable investmentMany are set to increase allocation to sustainable investment strategies significantly. However, of those who currently have sustainable investment goals, only about half have set transition targets and even less are implementing necessary steps to meet them.
Diversity, equity and inclusion considerationsMost do not have diversity, equity and inclusion (DEI) investment targets, however, investors with over $20 billion, who tend to be early adopters and trend setters, are looking into it, which means rigorous benchmarking of DEI could become a growing area of focus.
Managing middle-office risksMany see middle-office risks as fairly significant, including governance, operations, talent and regulation. However, few have taken necessary steps to have their investment performance and capabilities independently and externally assessed.
Outsourcing to investment partnersMany prefer to outsource their investment capabilities over managing portfolios in-house, especially within complex and resource-intensive asset classes, given resource constraints and a lack of talent and skillsets required to manage these investments.