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Institutional Investors Expect Only Modest Adjustments, Despite Anxieties

Despite being wary of fragile market conditions, rising interest rates and the growing popularity of passive investments, new research shows that institutional investors plan to make only modest adjustments to allocation plans and have not resorted to wholesale shifts in portfolio strategy.

To that end, institutional investors around the world are increasing allocations to non-traditional assets, including private equity, private debt, infrastructure and real estate, as they seek alternatives to bonds and search for higher returns in a crowded market, according to survey results from Natixis Investment Managers.

The survey of 500 worldwide institutional investors who manage more than $19 trillion of assets for retirees, governments, insurance companies and other institutions found that:


  • 77% of respondents worry the prolonged period of low interest rates has created asset bubbles;

  • 59% say the absence of volatility is a major investor concern;

  • 59% believe that volatility has been artificially suppressed by flows into passive investment strategies; and

  • 56% believe the increase in passive investing is distorting relative stock prices and 63% believe it is creating systemic market risks.


Active Management Gains Favor

Natixis’ data shows that institutional investors have increased allocations to actively managed investments since 2015, now reaching more than two-thirds of their overall portfolio (68%), while allocations to passively managed funds have declined to 32% from 36% in 2015.

According to the survey, three-quarters of institutions overall (76%) believe the current market environment is likely to be favorable for active investment management in 2018, including 78% of pension funds and 79% of foundation and endowment managers.

Institutional investors also believe that active management is better suited to access emerging market opportunities (75%), provide exposure to non-correlated assets (74%) and implement ESG strategies (68%). Moreover, nearly three-quarters (73%) say active management is also better at providing downside protection than passive strategies.

Meanwhile, 69% of investors think stock correlations will remain at the same level or increase further in the year ahead, and 76% of respondents say alpha has been harder to come by as the markets have become more efficient, according to the findings. However, nearly half (46%) expect the spread between security prices to increase in 2018.

Portfolio Moves and Sector Picks

The top three portfolio risk concerns of institutional managers going into 2018 are interest rates (62%), asset price volatility spikes (53%) and liquidity (32%), according to the findings. However, only 43% believe diversification across traditional stocks and bonds can provide adequate downside protection, and 64% say fixed income no longer provides its traditional risk management role in their portfolios.

On average, institutional portfolios are currently allocating to 37% to stocks, 34% to bonds, 21% to alternatives and 5% in cash. In addition, the report notes that over 90% are geographically diversified, with equity holdings across international developed and emerging markets.

Institutional managers indicate they will make the following allocation adjustments in the coming year:


  • Decrease exposure to U.S. stocks and increase allocations to equities in Europe and emerging markets (46% of respondents think Asia-Pacific offers the best of the emerging market investment opportunities).

  • Decrease exposure to high yield bonds and government debt, and increase exposure to emerging market debt.

  • Increase allocations to non-traditional assets, including private equity, private debt, real estate and infrastructure (61% believe private equity provides better diversification than traditional asset classes and 58% believe private debt provides better diversification than fixed income vehicles).


As for sector picks, institutional investors believe the technology sector (45%) will outperform the market in 2018 above any other sector, followed closely by health care (44%), defense/aerospace (43%), financials (41%) and energy (35%).

Conducted September and October 2017 by the research firm CoreData, the survey of 500 institutional investors included managers of corporate and public pension funds, foundations, endowments, insurance funds and sovereign wealth funds in North America, Latin America, the United Kingdom, Continental Europe, Asia and the Middle East.

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