Institutional investors globally expect to make more asset allocation changes in the next one or two years that they did in 2012 and 2014, most notably with alternative investments, domestic fixed income and cash, according to a new survey from Fidelity Investments.

However, institutional investors in some regions are bucking this trend. Investors in the U.S., for instance, are on a relative basis adopting a wait-and-see approach.

Worldwide, 72% of institutional investors said they would increase their allocation of illiquid alternatives in 2017 and 2018, 64% would do so for domestic fixed income, 55% for cash and 42% for liquid alternatives.

“With 2017 just around the corner, the asset allocation outlook for global institutional investors appears to be driven largely by the local economic realities and political uncertainties in which they’re operating,” Scott Couto, president of Fidelity Institutional Asset Management, said in a statement.

“The U.S. is likely to see its first rate hike in 12 months, which helps to explain why many in the country are hitting the pause button when it comes to changing their asset allocation.”

Couto noted that institutions are increasingly managing their portfolios in a more dynamic manner, that is, making more investment decisions today than they have in the past.

Moreover, expectations of lower returns and higher market volatility are driving more institutions into less commonly used assets, such as illiquid investments, he said.

“For these reasons, organizations may find value in re-examining their investment decision-making process as there may be opportunities to bring more structure and accommodate the increased number of decisions, freeing up time for other areas of portfolio management and governance.”

Fidelity surveyed 933 institutional investors in 25 countries this past summer, including 174 U.S. corporate pension plans, 77 U.S. government pension plans, 51 nonprofits and other U.S. institutions; and 101 Canadian, 20 other North American, 350 European, 150 Asian and 10 African institutions, including pensions, insurance companies and financial institutions. Respondents’ assets under management totaled some $21 trillion.

Primary Concerns

For all institutions in the survey, 28% said their top concern was a low-return environment, and 27% said it was market volatility. Worry about capital markets in this year’s survey increased from 2010, when 25% of survey respondents cited a low-return environment as a concern and 22% cited market volatility.

“As the geopolitical and market environments evolve, institutional investors are increasingly expressing concern about how market returns and volatility will impact their portfolios,” Derek Young, vice chairman of Fidelity Institutional Asset Management and president of Fidelity Global Asset Allocation, said in the statement.

“Expectations that strengthening economies would build enough momentum to support higher interest rates and diminished volatility have not borne out, particularly in emerging Asia and Europe.”

The survey found that investment concerns also varied according to institution type. Globally, 46% of sovereign wealth funds, 31% of public sector pensions, 25% of insurance companies and 22% of endowments and foundations expressed the most concern about market volatility.

A low-return environment was the top concern for 38% of private sector pensions. Continued Confidence

Their concerns notwithstanding, virtually all institutional investors surveyed believed that they could still generate alpha over their benchmarks to meet their growth objectives. Fifty-six percent said capital and funded-status growth continued to be their primary investment objective, about the same proportion as in the 2014 survey.

According to the findings, institutional investors on average were targeting approximately a 6% required return.

As well, they expressed confidence in being able to generate 2% alpha every year. About half of their excess return over the next three years would come from shorter-term decisions, such as individual manager outperformance and tactical asset allocation.

More important, Young said, these institutional investors understand that assuming more risk, including moving away from public markets, is one of many ways that can help them achieve their return objectives.

“In taking this approach, we expect many institutions will benefit in evaluating not only what investments are made, but also how the investment decisions are implemented,” he said.

Investment Decision Making

The survey identified several similarities in respondents’ decision-making process.

Forty-six percent of European and Asian institutional investors reported changes in their investment approach in the last three years, with that number smaller in the Americas at 11%. Globally, the most common change was to add more quantitative and qualitative inputs to the decision-making process.

Many institutional investors around the world said they had to contend with behavioral biases when helping their institutions make investment decisions. About 85% of respondents reported that they considered a number of qualitative factors when making investment recommendations.

Ninety-four percent of these said board dynamics had at least some influence on asset allocation decisions. Ninety percent pointed to board member emotions as affecting these decisions, and 86% to press coverage. Around one-third reported that these factors had a significant effect.

“Whether it’s qualitative or quantitative factors, institutional investors today face an information overload,” said Couto. “To keep up with the overwhelming amount of data, institutional investors should consider revisiting and evolving their investment process.”

He suggested that a more disciplined investment process could lead to more efficient, effective and repeatable portfolio outcomes, particularly in a low-return environment characterized by more expected asset allocation changes and a greater global interest in alternative asset classes.

— Check out Advisors Diversify Portfolios as Higher Volatility Looms: Natixis on ThinkAdvisor.