TORONTO & BOSTON--(BUSINESS WIRE)--Faced with volatility, greater risks and still-low yields, institutional investors are raising their exposure to higher-risk assets in pursuit of better returns, according to an international survey of institutional investors published today by Natixis Global Asset Management. At the same time, they are doubling down on risk management to better balance long-term growth objectives and liquidity needs, but say they need better ways of identifying risk across their portfolios.
Sixty-two percent of institutional managers feel they can handle near-term market risk despite greater volatility, which they say poses the biggest risk to their performance. Their top organizational concern, however, is low yield. Given the prospect for greater volatility and persistence of low interest rates, few institutions are relying on traditional portfolio strategies to meet their performance goals. Instead they are increasing their exposure to equities and alternatives and turning to illiquid assets and the private markets for risk-managed return generation and yield replacement.
Natixis surveyed 500 managers of public and corporate pensions, foundations, endowments, insurance funds and sovereign wealth funds in North America, Latin America, the United Kingdom, Continental Europe, Asia and the Middle East. Collectively, they manage $15.5 trillion in assets.
The findings provide insight into how institutional investors, largely considered to be the world’s largest, smartest investors, are using risk to their advantage. Meanwhile, 75% of institutional investors think investors might be taking on too much risk in pursuit of yield.
“While risk factors change over time, the challenge for institutional investors remains to deliver long-term results while navigating short-term market pressures,” said David Giunta, CEO for the United States and Canada. “Given their mandates, avoiding risk is not an option for institutional investors. They have to beat the odds or change the game, and they are doing so by balancing risks and embracing alternatives to traditional 60/40 portfolio construction, but always with an eye on their long-term objectives.”
Pursuing growth: Bigger role for real assets, alternatives
In examining their goals, 70% of investors believe their return expectations are achievable, but confidence may not be as strong as it seems on the surface. Half (50%) of the institutions expect to decrease return assumptions in the next 12 months. One reason for setting their expectations lower is the challenge of finding returns: 75% of those surveyed say alpha is becoming harder to come by as markets become more efficient.
While most are confident they’ll be able to meet their long-term liabilities, 62% think most of their peers won’t. Sixty-nine percent agree that traditional diversification and portfolio construction techniques need to be replaced with new approaches.
The survey found:
- Sixty-seven percent of institutional investors think private equity provides higher risk-adjusted returns than traditional asset classes, and more than half (55%) believe private equity provides better diversification than traditional stocks.
- Seventy-three percent think private debt provides higher risk-adjusted returns than traditional bond investments. The three areas they consider most promising are infrastructure, healthcare and the technology, media & telecom sector. Many also say they are likely to consider increasing use of direct lending (44%) and collateralized debt (34%).
- About one-third (34%) of institutions report that they are planning to increase allocations to real assets, including real estate, infrastructure and aircraft financing, in the next 12 months. As seen with their broader views on private markets, 63% of institutional decision makers’ primary goal for investing in real assets is earning higher returns.
- More than half of institutions (56%) report they are increasing exposures to alternative investment strategies this year. The adoption of alternative investments isn’t limited to growth portfolios, as 77% of respondents say alternatives have a role in liability-driven investing as well.
“Canadian institutional investors continue their quest for sources of alpha and may turn to private assets to combat this extended period of historically low rates,” said Abe Goenka, Chief Executive Officer at Natixis Global Asset Management Canada. “Even as they embrace the risk, they have a plan for managing their exposure using a wide range of diversification strategies.”
Balancing Growth, Risk, Liquidity and Liabilities
Few institutions are relying solely on increased fixed income as a way to manage portfolio risk. While a little over half of respondents (54%) believe that diversifying across traditional asset classes can provide adequate downside protection, just 3% strongly believe this strategy will be enough to do the job in the coming year. Instead, investors believe more effective techniques for managing portfolio risk are through risk budgeting (87%), diversifying holdings across sectors (86%), currency hedging (75%) and increasing their use of alternative investments (76%).
More than half (55%) of institutions report that their need for liquidity has limited their ability to invest in alternatives. Many institutional decision makers (71%) believe more stringent solvency and liquidity requirements established by regulators around the world have resulted in a greater bias for shorter time horizons and more liquid assets. This has proven to be a significant challenge to meeting liabilities that stretch out over multiple decades. Respondents say their top risk management concern is balancing long-term growth objectives with long-term liquidity needs.
The use of environmental, social and governance (ESG) factors in investment decision-making and manager selection is a key strategy both for growth and risk management. Fifty-eight percent of investors surveyed say that considering ESG issues is a way to generate alpha. An equal percentage says it is a way to reduce headline risks, such as lawsuits, environmental harm or social discord. Sixty-two percent believe ESG will be a standard practice for all managers in the next five years.
Liability Management and Outsourcing Expanding
Institutional investors face new challenges as they move beyond traditional markets and incorporate a broader range of investments with lower levels of liquidity and longer time horizons into their portfolios. Forty-six percent report that one of their biggest challenges is simply getting a consolidated view of risk across different exposures in the portfolio.
Meeting risk/return objectives also calls for decision-makers to go outside of their own team for specialized capabilities. More institutions are outsourcing management for at least part of their portfolio. About four in ten institutions (42%) currently use outsourced CIOs and/or fiduciary managers. On average those organizations that outsource have turned over management for 37% of their total portfolio.
Liability management is top of mind for institutional decision makers. Seven in ten institutions (69%) surveyed have adopted asset-liability matching strategies to help them align asset sales and income streams to future expenses with the goal of managing liquidation risk. Many of these strategies have relied on high-quality fixed-income securities, but institutions are now using a wider range of instruments in liability-driven investing (LDI).
They include hedging strategies (used by 47%), inflation-linked bonds (44%) and nominal bonds (37%). But they are also looking for a broader set of options. About three-quarters of institutional investors (77%) say alternatives have an important role to play in LDI portfolio management, as they offer valuable diversification and risk mitigation and complement the overall portfolio.
A significant number (62%) believe that despite using LDI strategies, most organizations will fail to meet their long-term objectives. Three in five (60%) say there is a lack of innovation in LDI solutions, although not as many (41%) are willing to pay a premium for innovative LDI solutions.
Natixis surveyed 500 institutional investors about their opinions on risk, predictions on asset allocation and views on market performance. The respondents included managers of corporate and public pension funds, foundations, endowments, insurance companies and sovereign wealth funds in North America, Latin America, the United Kingdom, Continental Europe, Asia and the Middle East. Data was gathered in October and November 2016 by the research firm CoreData. The findings are published in a new whitepaper, “Double Down.” For more information, visit https://ngam.natixis.com/us/research/institutional-survey-2016
About Natixis Global Asset Management
Natixis Global Asset Management serves thoughtful investment professionals worldwide with more insightful ways to invest. Through our Durable Portfolio Construction® approach, we focus on risk to help them construct more strategic portfolios that seek to endure today’s unpredictable markets. We draw from deep investor and industry insights and partner closely with our clients to put objective data behind the discussion.
Natixis Global Asset Management is ranked among the world’s largest asset management firms.1 Uniting over 20 specialized investment managers globally ($877 billion AUM2), we bring a diverse range of solutions to every strategic opportunity. From insight to action, Natixis Global Asset Management helps our clients better serve their own with more durable portfolios.
Headquartered in Paris and Boston, Natixis Global Asset Management, S.A. is part of Natixis. Listed on the Paris Stock Exchange, Natixis is a subsidiary of BPCE, the second-largest banking group in France. Natixis Global Asset Management, S.A.’s affiliated investment management firms and distribution and service groups include Active Index Advisors®;3 AEW Capital Management; AEW Europe; AlphaSimplex Group; Axeltis; Darius Capital Partners; DNCA Investments;4 Dorval Finance;5 Emerise;6 Gateway Investment Advisers; H2O Asset Management;5 Harris Associates; IDFC Asset Management Company; Loomis, Sayles & Company; Managed Portfolio Advisors®;3 McDonnell Investment Management; Mirova;5 Natixis Asset Management; Ossiam; Seeyond;7 Vaughan Nelson Investment Management; Vega Investment Managers; and Natixis Global Asset Management Private Equity, which includes Seventure Partners, Naxicap Partners, Alliance Entreprendre, Euro Private Equity, Caspian Private Equity and Eagle Asia Partners. Visit ngam.natixis.com for more information.
1 Cerulli Quantitative Update: Global Markets 2016 ranked Natixis
Global Asset Management, S.A. as the 16th largest asset manager in the
world based on assets under management ($870.3 billion) as of December
2 Net asset value as of December 31, 2016. Assets under management (AUM) may include assets for which non-regulatory AUM services are provided. Non-regulatory AUM includes assets which do not fall within the SEC’s definition of ‘regulatory AUM’ in Form ADV, Part 1.
3 A division of NGAM Advisors, L.P.
4 A brand of DNCA Finance.
5 A subsidiary of Natixis Asset Management.
6 A brand of Natixis Asset Management and Natixis Asset Management Asia Limited, based in Singapore and Paris.
7 A brand of Natixis Asset Management.