Investment Directions for Institutions
For Professional Investors only
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Varia: Welcome to the latest edition of Investment Directions for institutional investors, where we look at how portfolios are evolving in today’s market.
This year has vividly illustrated the new regime that BlackRock Investment Institute has long described. Policy, which was once a stabilising force, is now a source of uncertainty - particularly for US assets. Meanwhile, mega forces like artificial intelligence, geopolitical fragmentation, and demographic shifts are increasing supply constraints, driving dispersion and inflation and supporting higher-for-longer interest rates.
Institutional portfolios face a challenging outlook: muted returns for broad static exposures, with central banks less able to spur economic growth amid still-high inflation, and elevated volatility, as higher interest rates challenge the traditional diversification benefits of fixed income.
Against this backdrop, we see three themes shaping institutional portfolios.
First -we’re seeing an increasing need to more intentionally size allocations to US assets.
We believe the prospect of continued US equity market leadership remains strong, yet macro and policy uncertainty and elevated valuations call for a more deliberate approach. We advocate scenario testing to assess risks and blending US and World ex. US exposures to size allocations. With a growing US fiscal deficit not reflected in long-end UST valuations, BII prefers non-US developed market government bonds on a strategic horizon. Finally, while the USD’s global role remains intact, BII’s expectation of a strategically weaker USD calls for international investors to revisit their currency hedging approaches
Second - there are more opportunities for active management.
The era of elevated liquidity and persistently low interest rates has made way for a new environment of macro uncertainty, mega forces, and higher interest rates. This can create greater dispersion and is opening opportunities for skilled active managers and h edge funds to deliver alpha. To achieve more resilient, diversified alpha in this environment, we look to blend fundamental and systematic strategies in portfolios
And third - we see growing tailwinds and demand for private markets.
The confluence of long-term structural mega forces looks set to benefit infrastructure equity, and we see potential attractive entry points emerging in private equity and real estate as valuations adjust after earlier rate hikes. Income private markets continue to offer higher yields than public markets, though slower economic growth makes credit selection key.
Explore the full Investment Directions report to uncover actionable insights and case studies tailored to institutional portfolios.
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Watch Varia Pechurina, Lead GPS Investment Strategist for Institutional Clients, explore our highest-conviction ideas for institutional investors and the themes underpinning the evolution of portfolios.
Opportunities to evolve institutional portfolios
Institutional portfolios face a challenging outlook: muted returns for broad static exposures, central banks less able to spur growth amid still-high inflation, elevated volatility, and higher rates challenging the diversification benefits of fixed income. In the EMEA edition of Investment Directions for Institutions we focus on 3 strategic themes.
Sizing allocations to US assets
Amid trade policy uncertainty, many institutions have been reconsidering strategic allocations to US assets. US equities remain the largest allocation* in BII’s strategic portfolios – however we believe these allocations now require more deliberate positioning. In fixed income, BII is cautious on long-end US Treasuries amid expanding fiscal deficits, while forecasts for a strategically weaker USD call for a rethink of FX hedging, even if the currency’s global role remains intact.
Click on the link below to learn more
*BlackRock Investment Institute, Q2 2025 capital market assumptions, August 26 2025.
Dispersion creating alpha opportunities
Against the backdrop of higher market dispersion, institutional investors are increasingly looking to add some active long-only strategies to the core of their portfolios and hedge fund allocations as satellites for potential additional alpha generation.
Blending systematic and fundamental strategies may offer the most efficient uplift to return vs. a benchmark – and can help to ensure allocations to active strategies are optimised for a portfolio’s risk/return profile. It’s important to also take into account the following considerations when implementing such an approach in portfolios:
- The right mix of fundamental, systematic and indexing strategies depends on an investor’s active risk and fee budgets. Those with greater tolerance for active risk and higher fee budget may lean more heavily towards alpha-seeking strategies, whether fundamental or systematic.
- Selecting skilled managers who can manage macro factors (timing or neutralising them) is critical, as in today’s volatile environment, static factor exposures have become a greater drag for median managers than a decade ago.*
Risk management cannot fully eliminate the risk of investment loss.
*BlackRock July 1, 2025 Midyear Global Outlook
Tapping into mega forces through private markets
Institutional demand for alternatives is rising, driven by more muted public market returns and structurally higher macro uncertainty. We see long-term tailwinds for infrastructure equity and highlight potential attractive entry points in upcoming vintages in private equity and real estate, where valuations have adjusted following earlier rate rises, as well as opportunities in private credit.
- Infrastructure equity: Favoured for its resilient returns, diversification benefits, and inflation protection. Opportunities are underpinned by mega forces including growth in AI and digital (e.g. data centres, fibre, and mobile telecommunications towers) and the energy transition (e.g. grid infrastructure and storage). Mid-market and secondaries remain key areas of conviction for us.
- Private equity: Attractive entry points in upcoming vintages. The BlackRock Private Equity team sees strong potential in healthcare and technology, with APAC and Europe offering regional opportunities.
- Real estate: Poised for recovery, with Europe-focused funds raising the highest quarterly total since 2021 in Q2 this year.* Logistics, residential, and alternatives (e.g. data centres and life sciences) represent key areas of conviction.
- Private credit: Continued strong growth, driven by bank retrenchment, borrower demand for flexible terms and investor appetite for income and diversification. Compelling opportunities are seen across European and US mid-market, venture debt, opportunistic credit, and infrastructure credit.
* Source: Preqin, Real Estate Q2 2025
Case Study: Themes in action
To demonstrate how the trends outlined in this guide can enhance the risk-adjusted returns of an institutional portfolio, we optimise a starting portfolio using BII’s 30-year Capital Market Assumptions (CMAs) which reflect the themes above. The optimised portfolio is then compared to the original in terms of asset allocation and expected risk-return improvements.
Key changes include:
- Maintaining US equities as the largest allocation, while increasing exposure to other equity markets to benefit from more attractive valuations.
- Increasing allocations to hedge funds.
- Significantly increasing exposure to private markets – particularly infrastructure and direct lending.
Download the paper to see the results of the changes and how they could translate to your portfolios.
