In preparation for a potentially more volatile market environment, institutional investors are looking at ways to diversify sources of investment outperformance, according to new research.
While institutions of all sizes plan to make changes to their investment approaches, Fidelity’s Global Institutional Investor Survey finds that institutions with more than $1 billion in AUM expect to make the most significant changes to their asset allocation. These changes include:
- increasing investments in active, non-traditional passive strategies, including factor-based, non-cap weighted or other “smart beta” strategies, and
- decreasing allocations to passively managed strategies.
Larger institutions also expect to use more unconstrained strategies and derivatives in the future, while smaller institutions are less likely to use these strategies, the survey notes.
And while smaller institutions also plan to increasingly use non-traditional passive strategies, they are less likely as a group to shrink traditional passive exposure and increase the use of active strategies. Fidelity notes, however, that these institutions currently hold higher allocations of actively managed strategies (58% versus 44% of institutions overall).
The survey – which examines what’s top-of-mind for 905 institutional investors across 25 countries representing $29 trillion in AUM – finds that institutions are pursuing different portfolio construction approaches in part because of their expectations for the future, where they cite a low-return environment (21%) and volatility (17%) as their top concerns.
“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,” says Jeff Mitchell, Fidelity Institutional Asset Management’s chief investment officer. “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.”
Respondents from larger institutions also say they plan to increase private equity and infrastructure allocations more often than smaller institutions. Institutions of all sizes, however, indicate that they intend to decrease investments in developed market equity and increase emerging market equity holdings.
“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,” notes Judy Marlinski, president of Fidelity Institutional Asset Management.
Institutions are also aware of technology’s influence on the markets and portfolio strategies. According to the survey, 62% expect that advances in technology, such as high frequency trading algorithms and quantitative investment strategies, will make the markets more efficient.
