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February 22, 2018 at 08:10 AM
Seventy-eight percent of institutional investors around the world expected stock market volatility to surge in 2018, according to survey results released Thursday by Natixis Investment Managers.
The research found that investors were making opportunistic allocations to active managers and alternative investments to meet average long-term return assumptions of 7.2% in the year ahead.
For Natixis’ sixth annual survey, the research firm CoreData polled 500 institutional investors based in North America, Latin America, the U.K., continental Europe, Asia and the Middle East in September and October.
Seven in 10 investors said the addition of alternatives was important for diversifying portfolio risk, but they assigned distinct roles to several alternative strategies in their portfolios.
To diversify their investment portfolios, 47% of respondents cited global macro strategies, 41% commodities and 40% infrastructure investments as most appropriate.
For fixed income replacement, 55% chose infrastructure and 47% private debt to provide a source of stable income as interest rates rise and the 30-year bond bull market ends.
Slightly less than half of institutions said managed futures and hedged equity were best suited to manage volatility risk.
Seventy-two percent cited private equity as their top choice among alternatives for generating alpha, while 45% thought hedged equity could help meet this objective.
As an inflation hedge, 56% of institutions viewed commodities and 46% real estate as the best strategies.
“The sudden return of market volatility is a healthy reminder that it’s important to take a consistent approach to portfolio diversification,” David Giunta, chief executive at Natixis for the U.S. and Canada, said in a statement.
“Institutional investors are increasingly turning to active managers and alternatives for the tools and flexibility to diversify their portfolios and mitigate risk.”
Indeed, three-quarters of those surveyed said the current market favored active managers. And while alternative investments can present certain portfolio risks, the same proportion said the potential returns of illiquid investments were worth the risk.
At the same time, two-thirds reported that solvency and liquidity requirements had created a strong bias for shorter time horizons and highly liquid assets.
Risks hidden within the dynamic macroeconomic and regulatory market make it even more challenging for institutions to balance short-term opportunities and long-term objectives, Natixis said.
In their pursuit of more innovative investing strategies, 44% of institutional investors reported outsourcing at least some portion of their investment management function.
Among respondents who did this, they outsourced management for 41% of their portfolio. Forty-nine percent said their primary reason for doing so was to access specialist capabilities.
