Institutional asset owners are largely rethinking their exposure to the US, with private markets increasingly being viewed as a strategic investment allocation, new research has shown.
Morningstar’s latest Voice of the Asset Owner Survey has highlighted geopolitical uncertainty as the number one issue weighing on institutional asset owners, with many said to be torn between long-term fiduciary commitments and short-term macro dislocations in the market.
The paper, which surveyed 25 asset owners, 12 of which are located in Australia and New Zealand, found AOs are largely rethinking their asset and geographic allocation, with some indicating they are pivoting away from the US in favour of bringing funds onshore.
“I think we’ve seen peak exposure to the US, and we’ll be lowering our weighting. And the way we’re thinking at the moment is likely to be up-weighting to Europe and potentially bringing some funds back onshore,” one Australian superannuation fund is quoted as saying.
Others are starting to usher more funds towards private markets, with Morningstar finding Australian super funds, in particular, have a high proportion of investments in private markets, such as infrastructure, private credit and private equity.
“Where we’re starting to put more money to work is private credit … And historically, we had very little in private equity. But in the last 12 months, we’ve started to look for opportunities in the private equity space and that would continue,” a local fund is quoted as saying.
The research house also noted that institutional investors are drawn to private markets for the greater direct influence they offer over company operations and the prospect of fewer regulatory restrictions.
“Larger funds are evolving their strategies within private markets, taking a more active approach by applying fee pressure, engaging more in direct co-investments, and focusing on parallel funds rather than broad mandates,” Morningstar said.
These findings come as ASIC actively consults with the industry on whether, and to what extent, additional regulatory oversight of private markets is needed.
Just this week, the regulator held a symposium as an extension of its focus on capital markets where attendees, including the CEO of the Future Fund and a non-executive director at UniSuper, agreed that while public markets remain a preference for cost, transparency and flexibility, private markets are key for broader market dynamics.
Dr Raphael Arndt said: “If we could get the same asset in public or private markets, we would pick public every day of the week.”
He pushed back on the idea that regulation is driving capital into private markets, instead pointing to the longer time horizons required by growth companies.
“I think it’s really about the time horizon of the end investors in both markets. And the public markets aren’t particularly good places to fund a growth company that has to reinvest in its own business, or acquire businesses to turn around or fix something that’s broken and be patient. The irony, I think, is – that’s how you create a lot of value as an investor, and that’s why we would expect higher returns in private markets,” he said.
Similar arguments have been made by super funds in recent months, with Australian Retirement Trust telling ASIC private markets offer diversification benefits, lower volatility, greater portfolio control and access to a broader investment universe.
The fund, which has been investing in private markets since the mid-1990s, said: “By providing an alternative return source with differentiated risk/return characteristics, unlisted assets increase diversification and reduce overall portfolio risk as the assets can be relatively uncorrelated to business cycles.”
“By responding differently to fluctuating market conditions, this diversification through market cycles can result in enhanced return stability and portfolio quality,” it added.
ART also highlighted its ability to influence governance and portfolio construction through private investments, noting that such control enables the fund to pursue high-conviction sectors aligned with member outcomes.
