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Professional fund buyers — researchers and analysts who select funds for insurers and funds of funds and recommend or choose funds for broker-dealer, private bank and trust company platforms — are likely to face a challenging year ahead, according to Natixis Investment Managers.

Uncertainty arises from a variety of sources: volatile equity and fixed-income markets, higher interest rates and trade and geopolitical tensions.

Natixis commissioned a survey to find out how they planned to deal with these challenges. Two hundred professional fund managers in 22 countries throughout North America, Continental Europe, the U.K., Latin America and the Middle East responded to a poll conducted by CoreData Research in October and November.

The survey results were gathered before the December market plunge, but even so professional fund buyers had reduced their long-term return assumptions to an average of 7.7% from the previous year’s 8.4%.

These were the main issues on respondents’ minds:

  • Greater volatility in equities – 83%
  • Higher interest rates – 78%
  • Trade disputes – 78%
  • Growing speculative bubbles – 75%
  • An end to the U.S. bull market – 63%

Seventy-four percent of professional fund buyers in the survey said the current environment was favorable to active management. Indeed, some three in four portfolio investments are actively managed. Natixis said this meant that pro buyers strongly support the value added by top-quality fund managers.

Buyers expected active management to remain relatively constant into 2022. At present, 72% of allocations go to active investments, and in three years, 71% will do so.

The survey found that environmental, social and governance investing is increasingly becoming mainstream. Half of buyers surveyed said ESG factors were important in their organization’s current manager selection process, and more than half insisted that alpha was to be found in ESG investing.

Two-thirds of professional fund buyers said they would increase their allocation to ESG strategies in 2019, and a similar proportion said that including ESG factors would be standard practice for all investment managers within five years.

Despite their concerns about the next 12 months, professional fund buyers around the world are staying the course, according to the survey. For 2019, the survey found they were planning to make relatively small changes across asset classes:

  • Equities: 43% vs. 44.2% in 2018 and 43.6% in 2017
  • Fixed income: 31.7% vs. 31.9% in 2018 and 32.5% in 2017
  • Alternatives: 15.8% vs. 14.6% in 2018 and 13.7% in 2017
  • Cash: 7.1% vs. 6.6% in 2018 and 6% in 2017
  • Other: 1.6% vs. 2.1% in 2018 and 4.2% in 2017

Professional fund buyers are cutting back their overall equity allocation by just 1.2 percentage points from 2018. Within the asset class, however, they are willing to venture far from home to seize opportunities.

Most respondents had no plans to change in their allocation to fixed income investments. However, many buyers said they intended to direct less of their debt dollars into high yield bonds because of concerns about rising interest rates, a potentially weaker economy and the financial wherewithal of high-yield issuers.

Professional fund buyers see allocation to alternatives, which are projected to rise by 1.2 points in 2019, as valuable tools to help meet performance objectives, manage risk and diversify holdings.