Three critical steps for asset allocation at Official Institutions: embrace less liquid markets; explore a fuller credit universe; think globally.

Investors have spent 2023 adjusting their capital market assumptions to the new era of higher inflation, higher rates and shorter cycles.

In the midst of the transition last year, we urgently set out new asset allocations for a range of Official Institutions, whose existing portfolios were, in many cases, highly exposed to the low-yielding, long-duration investments that appeared most at risk.

Those suggestions would have helped preserve capital—but there is still a lot to do. Recovering from the market shock of 2022 may take a long time, given the unfavorable economic outlook, which means squeezing as much estimated return as possible from every unit of risk an investor is able to take. Our model optimizations suggests three critical steps to achieve that: embracing less-liquid markets, exploring a fuller credit universe, and thinking globally. We believe there are opportunities away from the broadly owned passive exposures—some of them potentially short-lived—that can help Official Institutions recover from 2022 and meet their longer-term objectives.

Executive Summary

  • Many Official Institutions endured portfolio losses during 2022, often on top of demands for emergency cash flow and investment through the COVID-19 pandemic.
  • With bond yields having risen but equity markets well above their lows, these investors are looking to prepare their portfolios for the new era of investing—but their economic and market outlooks are often cautious, weighed down by expectations of stagflation.
  • We have created optimized hypothetical portfolios for an illustrative Reserves Fund, Public Pension Fund and Sovereign Wealth Fund—preserving the same asset volatility, duration and fixed income credit rating as their current portfolios, with some additional investor-specific constraints.
  • We find that a cautious approach may not be optimal, identifying three critical steps that Official Institutions could take to enhance their risk-adjusted estimated returns:
    • For Reserves Funds: Consider a more meaningful role for slightly less-liquid but high-quality, high-yielding, cash-generative asset classes—if necessary, by creating separate “Liquidity” and “Investment” portfolios
    • For Sovereign Wealth Funds: Lean into the attractive estimated returns now on offer from credit spread products: liquid, semi-liquid and illiquid
    • For Public Pension Funds: Domestic duration is needed for liability matching, but more exposure to less-liquid, more credit-oriented and more global assets appears optimal
  • We also believe that the new investing environment raises some key points for consideration on active management: the role of tactical asset allocation; flexibility in fixed income strategies; equity-index concentration; the outlook for quantitative strategies; and the links between public and private markets.


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Typical Current Allocation Optimized Allocation
Estimated Return 5.02% 5.64%
Asset Volatility 2.40% 2.40%
Asset Duration 3.2yrs 3yrs
Fixed Income Rating AA+ AA+
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Source: Bloomberg, JP Morgan, MSCI, NAREIT, NCREIF, HFRI, Cambridge Associates, Credit Suisse, Neuberger Berman. Data as of June 2023.
IMPORTANT: The performance and risk projections/estimates are hypothetical in nature and reflect the Neuberger Berman’s Capital Market Assumptions. The estimates do not reflect actual investment results and are not guarantees of future results. This material is for educational purposes only and nothing herein constitutes investment advice or an investment recommendation. Asset classes are represented by benchmarks and do not represent any Neuberger Berman investment product or service. Estimates are shown gross of fees which do not reflect the fees and expenses associated with managing a portfolio. If such fees and expenses were reflected, estimates shown would be lower. Please see disclosures at the end of this material for additional information regarding Neuberger Berman’s Capital Market Assumptions.

Special thanks to Flora Xu, Client Strategist and Zhengyang Su, Institutional Solutions, who contributed to the analysis for this paper.