Investors’ goals have remained fairly consistent, but given the constraints of muted return outlooks, low yields and slow growth, they can benefit from a broader, more innovative and more unconstrained array of investment solutions, according to Neuberger Berman’s head of client coverage, chief operating officer Andrew Komaroff.
These include new approaches to traditional asset classes, taking advantage of dislocations created by changing regulation and specialized strategies managed within niche areas of the capital markets.
“As a result, we see a shifting set of priorities for different investor groups,” Komaroff said.
Komaroff offered these insights as part of a presentation by Neuberger Berman senior investors. They anticipate a modestly positive environment for risk assets, though with uncertainty associated with the effects of monetary policy divergence, low oil prices, a strong U.S. dollar and China’s growth trajectory.
Individuals and Advisors
Individual investors and their advisors in 2016 continue to face the challenges associated with intergenerational wealth transfer, Komaroff said.
“For 2016, we envision a broadening of the range of strategies available to individuals and their advisors to complement traditional diversifiers to familiar, core positions.”
With bond yields still hovering in the low single digits, he said, it is critical to evaluate a “new yield order” of nontraditional sources of yield that may be further out on the risk-return spectrum, such as senior floating-rate loans, master limeted partnerships and, on a selective basis, emerging market debt.
Credit long/short strategies can also play a role, given their ability to capture alpha without loading up on interest rate or duration risk.
“Market turbulence is reinforcing the role of investment products that can dampen overall portfolio volatility and still provide some equity-like upside potential,” Komaroff said.
Hedge fund strategies are now available more broadly through liquid alternatives retail funds that employ these strategies. He said investors increasingly understand that such vehicles’ potential value in the current low-interest-rate, volatile environment.
He said Neuberger Berman believed that market dynamics may be shifting in favor of active managers in 2016. Higher U.S. interest rates could contribute to more dispersion in company results, which could bode well for stock pickers.
For some time, environmental, social and governance issues have provided a valuable window through which to assess the individual securities — tied both to potential market opportunities and risks, Komaroff said.
With companies increasingly reporting on ESG matters, investors are becoming more aware of links between social issues and investing. “For 2016, individuals and their advisors can draw on socially responsive investment strategies to build a dialogue and broaden opportunities for return.”
Komaroff said the search for portfolio growth and yield, along with volatility mitigation options, were a top priority as plan sponsors grapple with updating plan options to deal with an evolving market.
In 2016, Neuberger Berman expects a continued shift in sponsor preferences to add global options to complement domestic ones in the search for growth.
Mid- and small-cap stock funds offer opportunity tied to greater inefficiencies and less coverage by financial analysts, and greater proportional exposure to the healthy U.S. economy.
Moreover, now may be a good time for sponsors to augment their international and global portfolio options as equity markets in Europe boast both reasonable valuations and the initial stages of economic recovery.
Komaroff said the retired or soon-to-be retired population that will rely on portfolio income to maintain their lifestyle was particularity vulnerable to today’s low-rate environment.
But many defined contribution plan menus have rather limited fixed income offerings, which may encourage participants to move further out on the risk-return spectrum, presenting challenges for those with lower risk tolerance.
“We see sponsors moving to more flexible bond strategies, such as core plus or even unconstrained bond, which can enhance income potential, while alternatives — the ‘third arrow’ of investment planning — can be employed in seeking to mitigate volatility and provide moderate growth potential.”
Komaroff said ESG issues were increasingly becoming a key consideration for businesses, but these same organizations often do not extend these ideas to their DC plan options. Fortunately, sponsors are increasingly engaged on ESG topics given participant interest and the attractive historical performance of SRI-oriented solutions. Institutions
According to Komaroff, institutional investors in 2016 will increasingly look to address their investment goals and liability shortfalls through innovative, creative thinking.
These may include risk-balanced methodologies that allocate based on a target risk budget to counter the equity risk tied to traditional 60/40 portfolios and, in Neuberger Berman’s view, can provide for a more informed portfolio.
In addition, for those that can lock up capital for longer periods, meaningful opportunities exist in private markets with attractive return potential.
Institutional investors could also find attractive return potential from strategies that have more flexibility to pursue returns across markets and asset segments, as well as through derivatives and selective shorting.
Investors can also seek more customization and value-added support from their managers, as well as unlock insights across asset classes. A deeper alignment of interests with managers can also help sharpen the focus on long-term results.
These elements reflect key opportunities available to institutional investors, including scale and a long investment time horizon.
For example, they can look to specialized private investments that seek to capitalize on specific market factors, and choose separate accounts that provide highly customized solutions.
They may also want to rethink their home bias in favor of GDP-based allocations that can seek to capitalize on faster-growth segments, including select emerging markets.
Finally, a holistic orientation is leading institutions to integrate ESG factors across portfolios premised on the notion that these can influence overall investment performance.
— Check out Top 6 Investment Ideas for 2016 on ThinkAdvisor.