June 10, 2013

Low Yields, Weak Returns Worry Institutional Investors

Volatility and inflation are other top concerns

Global institutional investors are more confident they can handle risk, but key issues are still concerning, according to a report released Monday by Natixis Global Asset Management.

The survey of 500 senior decision makers in 19 countries found rising volatility, inflation and low yields are still major worries.

Three-quarters of respondents said severe market swings were challenging, and 64% said rising inflation was a big concern. However, the top challenge was lower yields and weak returns, cited by 90% of respondents.

In the United States, 85% of respondents said they were confident about their approach to risk management and 88% said traditional strategies for asset allocation and portfolio construction were no longer ideal.

“Institutional investors and some individuals are looking at the traditional 60/40 portfolio as incomplete,” David Giunta, president and CEO of Natixis, told AdvisorOne on Friday. “They’re adding things like alternatives, which aren’t correlated to the markets the way traditional asset classes are, to take down risk and target similar returns.”

Giunta said that “it’s comforting to see people focus on risk management.” Traditionally, “Most investors start out with what kind of return they wanted. We’re looking at what kind of risk you want,” he added. “More people are looking at the risk side and starting with that.”

Globally, two-thirds of respondents said they were confident in their risk management approach and 60% agreed traditional strategies were not as effective as they used to be. Consequently, 88% said it would be difficult to meet their total return objectives.

More than 70% of global institutional investors said strategic asset allocation was a challenge. When asked where they were putting assets, 58% said they planned to add global equity holdings in 2013, and 46% said they would add emerging-market stocks. Sixty percent said they planned to add to their alternatives holdings in the next 12 months.

Of investors who already own alternatives, 71% think they’ll perform better in 2013 than they did last year. Nearly 60% of investors said they would increase their real estate holdings over the next three years, followed by emerging-market debt (51%) and infrastructure (46%). Forty-four percent of respondents said they would increase their exposure to multiasset absolute return funds and global macro funds.

Institutional investors expressed greater confidence in themselves than they did for the majority of investors. Nearly 90% said they were confident they could meet their own financial obligations in the future, but 70% of global investors and 81% of investors in the United States said individual investors would not be able to save enough for retirement.

“Retirement readiness is an overall concern,” Giunta said. “Investors just aren’t going to have enough.” He noted that many investors still have a lot of their holdings in cash, indicating they are still concerned about volatility. “They’re staying on the sidelines,” he said. “Hopefully, they can begin to look at durable portfolio construction and participate in market upswings.”

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Check out 5 Huge Market Shifts, and How Investors Should Respond: Merrill on AdvisorOne.

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