Despite the rise of alternatives during the past decade, in 76% of Asia gatekeepers say their clients are underinvested in private market strategies, compared with 64% in Europe, according to a study by from PGIM Investments, a global asset management business of US-based Prudential Financial.
The finding forms part of PGIM Investments’ fifth Gatekeeper Pulse study, which canvassed the allocation plans, investment attitudes and manager preferences of 210 UK, continental European and Asian gatekeepers at large global financial institutions — all of which have assets under management of at least $1bn.
Matt Shafer, the head of international distribution at PGIM Investments, expects private markets to witness a surge in demand over the coming years – echoing the popularity of emerging markets investing near the turn of the millennium.
“While it took time for investors to fully embrace the intricacies of investing in emerging market equity and debt, it would be hard to argue that a portfolio is adequately diversified today without exposure to the developing world. In the coming years, it is realistic for private markets to be thought of the same way,” Shafer said.
Indeed, to unlock greater allocations to private market assets, gatekeepers globally are seeking more favourable fee structures, greater transparency, and improved availability and accessibility.
“While public markets are vulnerable to short-term fluctuations, private markets offer investors stronger risk-adjusted returns, volatility hedging and downside protection, which could provide much needed diversification to portfolios amid market uncertainty,” Jessica Jones, head of Asia at PGIM Investments said.
Stock and bond correlations are leading 43% of gatekeepers in search of diversification, with 41% identifying private alternatives as the top asset class. In particular, 59% of Asia respondents plan to increase allocation to data centres, making it the top target for real estate allocations over the next 12 months.
“We are seeing strong appetites from Asian investors in global data centre strategies. Digitalisation and the growth of generative AI are creating a generational growth opportunity for date centres to become a mainstream investment,” Jones added.
Bullish on bonds
In terms of expectations for asset class returns over the coming year, gatekeepers are optimistic about the prospects of fixed income – both public and private. In public fixed income, 59% of gatekeepers expect an increase in returns, against just 25% predicting a decrease. In private fixed income, 50% predict an increase versus 26% for a decrease.
Hence, it is unsurprising that more than half (52%) of gatekeepers expect their firm to increase public fixed income allocations over the next year – which is the most of any asset class. Infrastructure and public equities are the next largest targets for increased allocations.
“Cash rates may still be high in many places around the world, but the certainty around expected cash returns logically declines over time,” Shafer said. “In contrast, given the long durations and longer maturities of bonds, fixed income may provide a higher degree of confidence for a targeted level of return.”
“In fact, cash may be the riskier option over the long term, particularly as many central banks have already begun to cut rates,” he added.
Volatile equities
There is less gatekeeper consensus about equity returns, with a net 10% of respondents expecting increased rather than decreased returns for both public equity and private equity.
Most fund selectors expect the investment environment over the next 12 months to feature increased equity volatility and heightened geopolitical risk – particularly with the recent elections in the UK and France. The US presidential race in November 2024 will add to the secular forces already impacting the investment environment.
Yet, global equities are the top targets worldwide for increased allocations, followed by thematic equities – while an element of home bias can be seen for both gatekeepers in Europe and Asia. As large-cap equities have been in the ascendancy for some time, 64% of global gatekeepers are now confident of a small- and mid-cap performance revival over the next 12 months, while 58% expect growth to outperform value over the same period.
“Even though rate cuts would provide a tailwind for equity markets, fundamentals are the true driver of long-term equity performance,” said Shafer. “Companies must demonstrate durable earnings growth and robust demand to perform well from here.”
