KKR released “No Turning Back,” a new Insights piece by Henry McVey, CIO of KKR’s Balance Sheet and Head of Global Macro and Asset Allocation (GMAA).
Based on a proprietary survey of nearly 50 Chief Investment Officers (CIOs) who collectively oversee over more than $8 trillion dollars in assets, the report examines how leading insurance companies are navigating and evolving their asset allocation priorities for today’s more volatile interest rate environment. Specifically, McVey notes that allocations to non-traditional investments have remained high, even as interest rates have risen significantly, because CIOs have gained greater conviction in the diversification and return benefits that these assets can provide in both low and high interest rate environments. The report also notes that CIOs are increasingly focused on leveraging both liquid and illiquid allocations to build more resilient “all-weather” portfolios to take advantage of dislocation and access new markets.
“The clear message we drew from our 2024 insurance survey participants is that there is “no going back” to more traditional approaches to asset allocation. Having endured huge fluctuations in central bank policies in recent years, CIOs are now more comfortable embracing investment strategies outside of traditional fixed income instruments that are helping to not only generate better returns but also diversify their risk profiles in today’s increasingly complex world,” said McVey.
More detailed conclusions for asset allocation include:
- Given the rise in interest rates, allocations to Investment Grade debt have increased but have not rebounded to peak levels seen in 2017.
- However, despite the record increase in interest rates in recent quarters, insurers' allocations to non-traditional investments, including Alternatives, declined only slightly to 28.9% in 2024 from 31.8% in 2021, but were still well above 20.3% in 2017.
- Within non-traditional investments, allocations to Structured Credit, such as CLO Debt, Asset-Based Finance, and other tradeable structures, increased the most, from 5.9% of portfolios in 2017 to 8.3% in 2024, with U.S. insurers having the highest allocations to the asset class.
- Private Credit allocations, which jumped to 7.7% in 2021, fell back to their 2017 levels of around 5.3% as CIOs shifted their portfolios to take advantage of higher yields in more liquid products as rates increased. However, Private Credit remains attractive to CIOs, with most choosing the asset class as their top choice for future allocations.
- Infrastructure and Private Equity also rank high on the list for future allocations, and CIOs are now finally seeing more opportunity in Real Estate Equity after the recent compression in values.
- Asset allocation priorities vary by type of insurer. On average, Life and Annuity CIOs tend to allocate more to Structured Credit and Real Estate Credit, while Property and Casualty CIOs tend to hold more than the average in Private Equity, Public Equities, and Bank Loans and High Yield.
- Similarly, allocation preferences vary by region, with Europe-based CIOs allocating more to Private Credit and Infrastructure, while Asia-based CIOs are leaning more heavily into Real Estate Credit.
Links to access this report in full as well as an archive of Henry McVey's previous publications follow: