Institutional investors’ mood for 2018 could be described in a well-known R.E.M. song lyric: “It’s the end of the world as we know it, and I feel fine.”
According to new survey findings from Natixis Investment Managers, institutional investors are wary of fragile market conditions, distorted asset prices, and systemic risks caused by central bank interventions and the growing popularity of passive investments, but they are confident their own portfolios can weather the storm with only modest changes. (Natixis Global Asset Management was renamed Natixis Investment Managers at the end of November.)
For the 2017 Natixis Global Survey of Institutional Investors, Natixis’ Center for Investor Insight surveyed 500 institutional investors around the world who manage more than $19 trillion of assets for retirees, governments, insurance companies and other institutions.
The survey found that 77% of respondents worry the prolonged period of low interest rates has created asset bubbles. Six in 10 say the absence of volatility is a major investor concern, and 59% believe that volatility has been artificially suppressed by flows into passive investment strategies.
More than half (56%) believe the increase in passive investing is distorting relative stock prices and creating systemic market risks (63%), which 72% believe individual investors aren’t yet aware of, according to the survey.
“What [institutional investors] do tell us is that a decade of low rates, low volatility and higher returns is likely to come to an end in 2018,” Dave Goodsell, senior vice president and executive director of the Durable Portfolio Construction Research Center, said during a press luncheon in New York. “Despite that change, they’re not taking a defensive posture. They see potential for global growth to continue, and it seems no one wants to leave the party before it’s done.”
In order to be better positioned for a changing market, respondents in the survey indicate they are making adjustments to allocation plans rather than a wholesale shift in portfolio strategy.
On average, institutional portfolios are currently allocating to stocks (37%), bonds (34%), alternatives (21%) and 5% in cash. Over 90% are geographically diversified, with equity holdings across international developed and emerging markets.
Institutional investors say they will decrease exposure to U.S. stocks next year (36%), and increase allocations to equities in Europe (33%) and emerging markets (27%). Nearly half (46%) think Asia-Pacific offers the best of the emerging market investment opportunities, according to the survey.
“On the heels of double-digit returns for the S&P 500 in 2017, institutional investors are betting on Europe and Asia as growth drivers for 2018,” the report states.
According to the survey, the biggest moves in the year ahead are increased allocations to nontraditional assets, including private equity, private debt, real estate and infrastructure.
Investors say they also plan on decreasing their exposure to high-yield bonds (33%) and government debt (26%), while increasing exposure to emerging market debt (24%).
“While many anticipate that these factors may translate into an uptick in volatility, it appears that a large majority of institutions believe there is opportunity to be found in the fury,” the report states.
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