Top 10 Institutional Asset Allocation Trends to Watch in 2021

With the new year underway and the return to business complete, you’re no doubt feeling the pressure to increase this, enhance that, and better yourself and your business in every possible way. It comes with the territory of the new year, and we know how exhausting those “trends” lists can get. 

We’re all staring down at phones bursting with must read trends of the new year, especially within a space as broad as institutional investments. 

So, we did the work for you. 

Dakota has been in the institutional investment industry since 2006, and we have a knack for knowing what to pay attention to, and when to tune out the noise. 

In this article, we’ve compiled the top 10 industry trends to keep your eye on throughout 2021. We broke it down into the top 5 institutional allocator industry trends, and the top 5 institutional allocator investment trends, giving you the full scope. 

By the end of this post, you’ll have a well-rounded understanding of what’s to come in the new year, so that your team can be as prepared as possible.

The top 5 institutional allocator industry trends 

1. Diversity and Inclusion is front of mind 

As institutional commitment to diversity and inclusion (D&I) has continued to grow, the approach allocators have taken towards those efforts has evolved. Gatekeepers are increasingly evaluating managers on their proven commitment to D&I initiatives, which Includes enhanced, ongoing reporting, benchmarking of progress against stated goals, and investment programs dedicated to funding emerging and established D&I managers. 

Regardless of channel, a deep understanding of the nuances of each individual program will be integral to success going forward.   

2. The home office continues to grow in influence – and drive assets

Continuing a trend seen over the last several years, wealth managers are increasingly adopting a centralized approach to manager selection and model allocation. This allows account executives to focus on client acquisition and retention while ensuring that clients are provided with the firm’s best thinking. 

This change is disrupting the traditional wholesaling approach and forcing investment management firms to refocus efforts on key gatekeepers and the home office.  

3. Institutional consultants will expand their reach into wealth management

While once primarily key gatekeepers of endowments, foundations, pensions, and other institutional investors, consultants have increasingly expanded their reach into the RIA and wealth management intermediary channels. 

Recognizing the unparalleled scale and scope that consultants can provide, large wealth managers are turning to consultants as a cost-effective way of outsourcing initial and ongoing investment and operational due diligence. 

This trend accelerates a deep understanding of each consultant’s process, and therefore their client base is imperative for the investment sales professionals across channels.  

4. Adoption of alternative platforms as a comprehensive solution continues 

As interest in alternative investment strategies has grown among high and ultra-high net worth clients, these investment platforms have emerged as key players in the democratization of alternatives. 

Alternative platforms solve key problems for allocators such as streamlining the subscription process, consolidating reporting, and lowering minimums. As allocators large and small turn to platforms as a comprehensive solution for their alternative programs, knowledge of not only the key players but how they work with allocators and managers is critical. 

5. Within the wealth management channel, the only constant is change 

As anyone in the RIA space knows, the channel remains in a constant cycle of disintermediation and consolidation, with successful teams increasingly leaving the larger bank platforms only to be acquired later. 

As fee compression continues, RIAs are increasingly reliant on scale to provide the scope of services that wealth management clients demand. This dynamic demands that investment sales professionals have a comprehensive understanding of the entire wealth management channel, not just a focus on the largest allocators, to be successful.

The top 5 institutional allocator investment trends    

6. Virtual due diligence is here to stay 

With the recent roll-out of two viable vaccines, the investment management industry has breathed a collective sigh of relief that the world may return to normal. However, for both investment sales professionals and due diligence analysts, the current method of virtual due diligence is likely here to stay. 

Investment and operational due diligence at firms both large and small have indicated a willingness, and in many cases even a preference, to conduct due diligence virtually. While onsite visits will likely never be completely eliminated, the transition to a virtual approach will likely decrease hurdles and time to add new products.  

7. In the search for yield, investors turn to alternative credit 

In a world of persistently low interest rates, rather than stretching down the credit spectrum, allocators are increasingly turning to private and opportunistic credit to increase current yield and total return to clients.

Allocators are finding that, with a relatively limited increase in duration, clients can access higher quality credits with substantially higher expected returns. This tradeoff between liquidity and returns is one institutional allocators (and their clients) are more than willing to make.   

8. Allocator attention to digital assets continues to rise

Whether as a result of the meteoric rise in digital assets, concerns about inflation, or general curiosity about the asset class, allocators are once again looking for investments across the digital ecosystem. 

What was once the near exclusive domain of sophisticated family offices has now proliferated across channels, with investors from banks to large insurance companies increasingly making sizable investments in digital assets. Many observers of the space have indicated that the next year or so will be crucial in understanding whether this trend is here to stay.

9. Investors are (gradually) returning to real estate strategies

Many allocators who moved quickly to halt or reduce real estate investment are surveying a 2021 landscape with a renewed interest in the opportunity set. As a new normal returns, allocators are finding that they can acquire real estate equity and debt of higher quality and credit at a better price. This has prompted allocators off the sidelines to take a new (or renewed) look at the asset class.    

10. Interest in private equity remains high, with co-investment quality and volume a deciding factor for allocators 

As institutional allocators continue to look to private equity as a source of return, enhanced access to quality co-investment deal flow has gone from a “nice to have” to a “need to have.” 

Co-investment is increasingly seen as a necessary component of private equity programs not only to reduce overall fees, but to enhance investor returns. This has benefited managers with proven access to quality deals, and a proven ability to execute on behalf of investors. 

How to make the most of a year full of change

While 2020 threw a wrench into many plans, as you’ve seen above, 2021 promises to have its own list of changes in store. With returns to old strategies, a move to virtual due diligence, and a renewed interest in specific asset classes, allocators will need to keep their finger on the pulse as things continue to change over the course of the year. 

Staying in contact with other allocators and investors within the industry is a critical way to stay engaged until things (slowly) return to normal. 

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Written By: Amy Sariego, Director of Content Marketing

Amy Sariego is the Director of Content Marketing at Dakota.