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Big Investors Prepping for Volatility, Low Returns: Fidelity

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Institutional investors looking ahead to 2025 expect to significantly alter their asset allocation as a way to diversify sources of investment outperformance in part because they expect a lower return environment and market volatility, according to Fidelity Investment’s global institutional investor survey, released Monday.

Institutions with $1 billion or more in assets under management generally said they would increase their investments in active, nontraditional passive, alternatives and unconstrained strategies and derivatives.

“Institutions realize that in the long term, market activity may no longer be enough to generate returns, so they have to work smarter to reach their goals,” Jeffrey Mitchell, chief investment officer at Fidelity Institutional Asset Management, said in a statement.

“Institutions are restructuring their portfolios to reflect this changing investment ecosystem, whether by increasing allocations to certain investment styles or asset classes, or embracing new investment strategies.”

Fidelity’s online and telephone poll was conducted in 2018 among 905 investors at pensions, insurance companies and financial institutions in 25 countries with total assets under management of more than $29 trillion. Strategic Insight executed the survey in North America and FT Remark, a Financial Times division, did so in all other regions.

Sixty-two percent of institutions in the survey said they expected that advances in technology, such as high-frequency trading algorithms and quantitative investment strategies, would make markets more efficient.

“Technology continues to fundamentally change the industry and how we think about investing,” Judy Marlinski, president of Fidelity Institutional Asset Management, said in the statement.

“We encourage institutions to collaborate with their investment partners — investors and asset managers alike can work to foster a culture of innovation in investing.”

Search for Alpha

Many institutions plan to change their investment approaches, but larger ones with $1 billion or more in assets are much likelier that smaller ones to do so, according to the survey.

For one thing, bigger investors plan to decrease passive allocations and increase allocations in active and nontraditional passive, including factor-based, non-cap weighted or other smart beta strategies.

Smaller institutions, too, expect to use more nontraditional passive strategies, but this group is less likely to shrink traditional passive exposure and increase the use of active strategies; however, 58% of these already hold higher allocations in actively managed strategies, compared with 44% of institutions overall.

Fidelity’s survey found that 33% of larger institutions planned to increase allocations to private equity and 24% to infrastructure, compared with 16% and 11% of smaller institutions. At the same time, institutions of all sizes said they intended to cut back investments in developed market equity and increase emerging market equity holdings.

Two-thirds of the bigger respondents said they expected to use more unconstrained strategies in the future and 43% said they would use more derivatives, versus 29% and 28% of smaller institutions that indicated they would use these strategies.

“Larger institutions may be leading the trend toward restructuring their portfolios, but we expect these trends to be adopted more broadly throughout the wealth management industry,” Marlinski said.

— Check out Passive Market Share to Overtake Active in 2 Years: Moody’s on ThinkAdvisor.