Institutional investors anticipate a year of dramatic change in 2017, according to a study by Natixis Global Asset Management.
Natixis recently released the investment outlook of 500 institutional investors from around the world who manage corporate pensions, public pensions, sovereign wealth funds, insurance funds as well as endowments and foundations.
Market 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 as the top sources of volatility for 2017.
“Unprecedented economic and political forces around the world are the top concern for institutions in 2017,” John Hailer, CEO of Natixis Global Asset Management for the Americas and Asia and head of global distribution, said in a statement.
Brexit, a Donald Trump presidency and Italy’s no vote on constitutional reforms are “emblematic of the forces of change” that could contribute to heightened volatility, according to the Natixis study.
However, these events are likely just the start of geopolitical volatility around the world. Elections in France, Germany and the Netherlands – where populist sentiments are running high – are still to come in 2017. In addition, the outcomes of political upheaval in South Korea and Brazil, as well as Britain’s plan for invoking Article 50 to leave the European Union also add to uncertainty across the globe.
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 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 of investors surveyed before the election said emerging markets would be the best-performing equity market in 2017 compared with 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.
To combat volatility in 2017, the surveyed institutional investors 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,” Hailer said in a statement.
Almost three-quarters of those surveyed said current market conditions are more favorable to active management. According to the survey, more than eight in 10 institutions choose active management over passive for generating alpha, and three-quarters say they are willing to pay a higher fee for potential outperformance.
In line with this, the survey finds that institutions project they will use passive investments less than they previously believed. Current portfolio projections show passive allocations have decreased by 3.3% in the past year, according to the Natixis study.
The study also finds that institutions anticipate adding just 1% to current passive allocations over the next three years, a figure that’s “considerably less” than the 7% projected for the same time frame in 2015.
In addition to a shift toward active management, institutional investors will shift more toward alternative investments in 2017. According to the survey, investors plan on raising their alternative allocations to 22% from 18%
two-thirds of institutional investors globally say it is essential to invest in alternatives in order to diversify portfolio risk.
Where else are institutional investors planning on putting their money in 2017? The survey finds that they will likely raise stock allocations slightly and cut bond holdings.
“Looking at a market that could be marked with a double-hit of increased volatility and rising interest rates (at least in the U.S.), institutions say they will dial back on fixed income allocations,” the Natixis report states.