“U.S. political and regulatory risks appear to have moved to the foreground for a lot for North American institutional investors, and as a result many have found perhaps temporary refuge in rising stock markets,” Kevin Plumberg, the editor of a new research report by The Economist Intelligence Unit, said in a statement on Tuesday.
Eighty-one percent of North American institutional investors in the research said uncertainty in the U.S. regulatory environment had driven them to reallocate their portfolios to a particular asset class, and for 52% of these, the asset class was equities.
According to the report, sponsored by Franklin Templeton Investments, this suggests that some of the current bull market in U.S. stocks is being driven by tactical investments, rather than by fundamentals-driven decisions.
Plumberg said investors would still need to be ready tactically to stay focused on their long-term goals as near-term risks evolved.
In fact, 47% of investors surveyed said they had become more focused on their long-term goals in response to short-term factors. Only 20% said they had become more focused on meeting short-term objectives.
Low yields and market volatility were the chief reasons some investors had shortened their investment time horizons, increased portfolio churn and reduced investment holding periods. Forty-seven percent said market volatility prevented them from lengthening their time horizons.
The EIU surveyed 571 institutional investors around the world this summer, including 143 North American respondents of which 64% were pension funds, 17% corporate treasuries, 15% endowments and 4% sovereign wealth funds. Twenty-two percent of these had more than $5 billion in assets under management.
Concerns about the Trump administration’s “idiosyncratic style,” its limited ability to bring about legislative change and the future of U.S. monetary policy dominate investors’ outlook, according to the report.
Forty-two percent of respondents put political risk at the top of their list of challenges, followed by mispricing of risk, cited by 35%; the growth cycle, 33%; portfolio diversification, 32%; and market volatility, 31%.
The report said interviews with investors suggested some were thinking of their portfolios in terms of outcomes and themes rather than traditional asset classes.
Asked about the main ways they manage portfolio risk, 47% of North American respondents said they had increased use of alternatives — “a clear sign of the sophistication of the asset class,” according to the report — while 45% said asset-class diversification and 36% cited risk budgeting.
When EIU researchers asked where the best opportunities for alpha generation over the next three to five years lay, 52% of investors said they hoped to generate returns above their benchmarks in new markets.
Forty-four percent said they were focused on new products, and 43% on arbitrage opportunities arising from differences in regulations in multiple jurisdictions.
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