Risk systems, compliance and alternatives: How institutional investors want to weatherproof their portfolios

In light of increasing uncertainties both geopolitically and with regard to the use of artificial intelligence, many of the world's largest asset owners are reorienting themselves. This is the conclusion of a study by Mercer. The management consultancy surveyed 74 large institutional investors with assets under management of just over $2 trillion between October 2024 and last January.

The study shows that large investors are intensively preparing for regulatory risks and technological changes. "One of the most interesting data points in this study is the enormous volume of investment in risk systems, data management, and compliance," emphasizes Eimear Walsh, European Head of Investments at Mercer. Fifty-two percent of respondents say they will invest in risk systems and data management in the coming year, and another 33 percent in compliance infrastructure.

Regulatory risks are becoming increasingly important in the long term

This focus is no coincidence: While large investors see geopolitical risks (35 percent) and inflation (31 percent) as the greatest threats to their portfolios in the short term, concerns about regulatory changes are increasing over a three- to five-year horizon. 32 percent of respondents view regulatory risks as a long-term threat—an increase of 12 percentage points over the previous year.

Private markets first choice for allocation increases

The study continues to show an allocation trend toward private markets , with 45 percent of large institutional investors increasing their allocations over the past year. Looking ahead, 48 percent of respondents plan to expand their investments in private debt/credit over the next 12 months, while 50 percent plan to increase their investments in infrastructure. This trend is particularly pronounced among the largest investors with assets under management of over $20 billion.

“We are also observing that German investors are diversifying their risks with the aim of a robust investment strategy and are increasingly investing in private markets,” says Jeffrey Dissmann, Head of Investments at Mercer Germany.

Also notable is the reluctance toward public markets. Stocks from the United Kingdom (15 percent planned reduction) and the United States (7 percent planned reduction) are particularly under pressure. The exception is large European investors, who are more optimistic about their domestic stock markets than their American and British counterparts.

A preference for outsourcing investment management is also evident, particularly for more complex asset classes. Only 5 percent of the large investors surveyed manage their portfolios entirely internally. Only 5 percent of institutions manage hedge funds themselves, while the majority also rely on external managers for private equity (23 percent) and private debt (27 percent). 64 percent of respondents state that internal management of certain asset classes is too resource-intensive, while 62 percent cite a lack of appropriate talent and specialists .

Large investors recognize AI revolution, hesitate to implement

Another groundbreaking trend concerns artificial intelligence. At 43 percent, institutional investors see AI as the most influential long-term factor for the global economy over the next five to ten years—ahead of geopolitics (34 percent) and climate change (34 percent). However, 69 percent of respondents have not yet implemented or developed an AI policy.

A strategic retreat from climate targets is also striking. The proportion of large investors who do not want to set net-zero targets has increased by 10 percentage points to 36 percent compared to the previous year. Nevertheless, 24 percent of respondents plan to increase their allocations to sustainable funds , while only 8 percent plan to reduce them.

"We see that despite market volatility, significant confidence remains among large investors," summarizes Rich Nuzum, Managing Director at Mercer. "Investments in operational infrastructure and the continued outsourcing of complex asset classes demonstrate that institutions are responding strategically to the challenges of an uncertain market environment."

For the study, Mercer Investments surveyed large investors from more than 16 countries, including pension funds (42 percent), insurers (19 percent), nonprofit organizations (14 percent), and asset managers (9 percent). Fifty-nine percent of participants were from Europe, 15 percent from the UK, 14 percent from the US, and 12 percent from other regions.

The full study can be found here.