BOSTON & LONDON--(EON: Enhanced Online News)--Institutional investors say world political and economic events could push the level of market volatility higher in 2017, finds a study by Natixis Global Asset Management. As a result, they plan to reset their portfolios, relying on active management and alternative assets as they seek to manage risk and boost returns.
“In volatile markets, institutions are looking to active management to strengthen returns and manage risk.”
Natixis surveyed decision makers at 500 institutional investment firms around the world on their market outlook and asset allocation plans for 2017 and beyond. Volatility topped the list of concerns for 2017, with 65% pointing to geopolitical events, 38% citing the U.S. elections, and 37% noting the potential for changing interest rate policies.
“Unprecedented economic and political forces around the world are the top concern for institutions in 2017,” said John Hailer, CEO of Natixis Global Asset Management for the Americas and Asia and Head of Global Distribution. “In volatile markets, institutions are looking to active management to strengthen returns and manage risk.”
Pros Choose Active Management Over Passive
Especially in anticipation of higher volatility, institutional investors favor active management over passive. They also express concern over the market distortions caused by passive investing:
- 73% say the current market environment is likely favorable to active management
- 78% say they are willing to pay a higher fee for potential outperformance
- 49% say passive investing distorts relative stock prices and risk-return trade-offs
- 64% say active management provides better risk-adjusted returns than passive
Over the longer-term, institutions project they will use passive investments less than they previously believed. They say 67% of their assets are actively managed and 33% are in index-tracking investments, and they expect the share of passive investments to rise only one percentage point, to 34%, in the next three years. In a 2015 Natixis survey, investors expected 43% of assets would be passively managed within three years.
The main reason for using passive strategies, cited by 88% of respondents, is a desire to manage fees, but 57% said the prevalence of “closet indexers” – managers who charge higher active fees for index-like strategies that closely hug their benchmark – as another reason. Three-quarters (75%) of these professional investors say that individual investors are unaware of the risks of passive strategies and have a false sense of security about their use.
Move to alternatives tops asset allocation trends
Half (50%) of surveyed institutional decision-makers across the globe plan to increase their use of alternative strategies in 2017, with two-thirds (67%) using them for diversification and a third (31%) for risk mitigation. Emerging market equities, high yield fixed income and financials are other big winners.
The survey found:
- Use of alternatives rises: Institutional investors will shift more toward alternative investments in 2017, raising their allocations to 22% from 18% of assets. They will increase equity allocations slightly, to 36% from 34%, and dial back on fixed income, to 32% from 35%.
- Biggest winners of 2017: Among stocks, 39% of investors predict emerging markets equities will be the biggest gainers next year. Within alternatives, 32% say private equity will do the best. And among bonds, 53% think high-yield issues will outperform.
- Possible disappointments: On the other hand, investors say U.S. stocks (named by 41%), medium- to long-term government bonds (67%) and, among alternatives, real estate (29%) could trail the pack.
- Sector picks: Institutions predict financials will be the best-performing stock sector in 2017, while utilities could deliver the biggest disappointment. In private equity, the best sectors will be media and telecom, infrastructure and healthcare.
U.S. Presidential Impact
The responses also showed that institutional investors’ confidence suffered after the U.S. election. Natixis conducted the survey in two stages, with 340 investors polled just before the U.S. presidential election on Nov. 8 and 160 responses collected just afterward. Prior to the election, two-thirds of respondents expressed confidence in their organization’s ability to handle the risks associated with investment performance, which fell to only 53% among those surveyed after the election.
The outlook for U.S. and emerging market stocks also changed substantially after the election. Forty-three percent (43%) of investors surveyed before the election said emerging markets would be the best-performing equity market in 2017 compared to 31% of those surveyed after the election. Meanwhile 46% of those surveyed before the election said the U.S. would be the biggest disappointment among global stock markets, compared with 31% of those surveyed afterward. The proportion of investors who said longer-term government bonds would be the most disappointing fixed income asset class in 2017 rose from 63% before the election to 76% afterward.
Natixis surveyed 500 institutional investors about their opinions on risk, predictions on asset allocation, and views on market performance. The respondents included managers of corporate and public pension funds, foundations, endowments, insurance funds and sovereign wealth funds in North America, Latin America, the United Kingdom, Continental Europe, Asia and the Middle East. Data was gathered in October and November 2016 by the research firm CoreData. The findings are published in a new whitepaper, “Buckle up, it’s going to be a bumpy ride.” For more information, visit https://ngam.natixis.com/us/research/institutional-survey-outlook-2016
About Natixis Global Asset Management, S.A.
Natixis Global Asset Management serves thoughtful investment professionals with more insightful ways to understand and manage risk. Through our Durable Portfolio Construction® approach, we help them construct more strategic portfolios that seek to produce better outcomes in today’s unpredictable markets. We draw from deep investor and industry insights and partner closely with our clients to put objective data behind the discussion.
Natixis is ranked among the world’s largest asset management firms.1 Uniting over 20 specialized investment managers globally ($897 billion AUM2), we bring a diverse range of solutions tailored to meet every strategic challenge. From insight to action, Natixis helps our clients better serve their own with more durable portfolios.
Headquartered in Paris and Boston, Natixis Global Asset Management, S.A.’s assets under management totaled $897 billion as of September 30, 2016.2 Natixis Global Asset Management, S.A. is part of Natixis. Listed on the Paris Stock Exchange, Natixis is a subsidiary of BPCE, the second-largest banking group in France. Natixis Global Asset Management, S.A.’s affiliated investment management firms and distribution and service groups include Active Index Advisors;3 AEW Capital Management; AEW Europe; AlphaSimplex Group; Axeltis; Darius Capital Partners; DNCA Investments;4 Dorval Asset Management;5 Emerise;6 Gateway Investment Advisers; H2O Asset Management;5 Harris Associates; IDFC Asset Management Company; Loomis, Sayles & Company; Managed Portfolio Advisors;3 McDonnell Investment Management; Mirova;7 Natixis Asset Management; Ossiam; Seeyond;7 Vaughan Nelson Investment Management; Vega Investment Managers; and Natixis Global Asset Management Private Equity, which includes Seventure Partners, Naxicap Partners, Alliance Entreprendre, Euro Private Equity, Caspian Private Equity and Eagle Asia Partners. Visit ngam.natixis.com for more information.
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NGAM Distribution, L.P. is a limited purpose broker-dealer and the distributor of various registered investment companies for which advisory services are provided by affiliates of Natixis Global Asset Management, S.A.
All investing involves risk, including risk of loss. There is no guarantee that active management will strengthen returns and active managers often underperform their benchmarks. Alternative investments involve unique risks that may be different than those associated with traditional investments, including illiquidity and the potential for amplified losses or gains. Investors should fully understand the risks associated with any investment prior to investing.
1 Cerulli Quantitative Update: Global Markets 2016 ranked
Natixis Global Asset Management, S.A. as the 16th largest
asset manager in the world based on assets under management ($870.3
billion) as of December 31, 2015.
2 Net asset value as of September 30, 2016. Assets under management (AUM) may include assets for which non-regulatory AUM services are provided. Non-regulatory AUM includes assets which do not fall within the SEC’s definition of ‘regulatory AUM’ in Form ADV, Part 1.
3 A division of NGAM Advisors, L.P.
4 A brand of DNCA Finance.
5 A subsidiary of Natixis Asset Management.
6 A brand of Natixis Asset Management and Natixis Asset Management Asia Limited, based in Singapore and Paris.
7Operated in the U.S. through Natixis Asset Management U.S., LLC.