Professional Fund Buyers Anticipated the Return of Volatility, but Disagree on Portfolio Implications, Finds Natixis Investment Managers Survey

TORONTO--(BUSINESS WIRE)--While some investors may have been surprised by turbulent markets at the start of 2018, professional fund buyers have been expecting a spike in volatility. Natixis Investment Managers recently surveyed 200 professional fund buyers who are responsible for selecting the funds included on private bank, insurance, fund of funds, and other retail platforms, and most (eight in ten or 78%) said they had been surprised that volatility had remained so low for so long. Accordingly, approximately half (49%) cited asset price volatility spikes as one of their top concerns for 2018. However, they are split on the impact volatility has on their portfolios, with 39% who see increasing volatility as a threat, while 38% anticipate a positive effect on portfolio performance.

“Although professional fund buyers are split in opinion over the impact volatility will have on the market, 80% agree that increased volatility, increased return dispersion and lower correlations make a strong case for active management,” said Abe Goenka, Chief Executive Officer at Natixis Investment Managers Canada. “Overall, the majority of fund buyers responded that active management provides greater value in meeting critical portfolio objectives, and that they anticipate minimal changes in their allocations to active investments over the next three years.”

Evolving portfolio strategies to the new reality

They may be split over the impact of volatility on portfolios, but more than eight in ten professional fund buyers (82%) are confident that their average return target of 8.4% in 2018 is realistically achievable, as they evolve investment strategies to meet the new market reality. The most popular strategies among the professional investor community for managing risk include diversifying by sector (91%), risk budgeting (80%) and increasing the use of alternatives (75%).

Two in five portfolio professionals (42%) say they will manage duration to mitigate principal losses in bond portfolios. Yet, three in five (62%) say that fixed income no longer provides its traditional risk management role, with 20% increasing the use of alternative investments and 18% reducing fixed income exposure overall.

ESG: a different kind of value investing

As they look to deliver on the expectations of end investors, professional fund buyers have an opportunity to incorporate ESG (environmental, social and governance) investments that will help meet the preferences of the 78% of individual investors worldwide who say they want their investments to align with their personal values and the 72% who say they want their investments to do social good.¹ Fund buyers are reporting that ESG may not be getting the recognition it deserves; just four in ten (43%) surveyed say ESG is incorporated in their firms’ investment process. Some of the perceived barriers keeping them from implementing ESG are the lack of transparency (42%), conflicts between short-term returns and long-term sustainability goals, and potential green-washing² by companies selling investments as ESG that do not meet the standards they are claiming (37%).

“Investors are concerned about issues that go beyond the balance sheet and want to own companies that reflect their beliefs. This is particularly important at a time when ESG is at the inflection point where investors are starting to see both alpha generation and risk management potential within the strategies,” said David Goodsell, Executive Director, Natixis Center for Investor Insight. “Seventy-six percent of professional fund buyers have responded that alpha is becoming harder to achieve because of market efficiency, and they may want to consider how ESG can help deliver.”

Implementing alternative investments

Professional fund buyers are increasingly looking to diversify portfolio risk, and 70% believe it is essential to invest in alternatives to do so:

• More than three in five (65%) believe that traditional asset classes are too closely correlated to provide distinctive sources of return.
• A range of alternatives can help with broader portfolio diversification, with almost half (47%) highlighting commodities, 44% global macro, 43% infrastructure, 38% private equity and 37% managed futures.
• In anticipation of increased volatility, half (51%) of those surveyed see the potential of edged equity strategies to absorb market shocks while 46% say managed futures are well suited to an increasing volatile market environment.

However, alternatives are not only being employed to help diversify portfolios. Over a third of professional fund buyers see alternative investments as an effective strategy for generating alpha:

• Almost three in five (58%) report that their organization is increasingly using alternatives as a replacement for fixed income, with a clear preference for real estate (52%) to generate income.
• Four in ten believe infrastructure is well suited to addressing income objectives, while more than a third (35%) see private debt as an effective income generation vehicle.
• Over half (58%) identified private equity as an effective strategy to generate stronger returns, with a third (31%) also highlighting private debt.

Methodology

Natixis surveyed 200 international professional fund buyers responsible for selecting funds included on private bank, insurance, fund of funds, and other retail platforms. Data was gathered in September and October 2017 by the research firm CoreData. The findings are published in a new whitepaper, “Meet the New Normal, Same as the Old Normal.”

About the Natixis Center for Investor Insight

As part of the Natixis Investment Institute, the Center for Investor Insight is dedicated to the analysis and reporting of issues and trends important to investors, financial professionals, money managers, employers, governments and policymakers globally. The Center and its team of independent and affiliated researchers track major developments across the markets, economy, and investing spectrum to understand the attitudes and perceptions influencing the decisions of individual investors, financial professionals, and institutional decision makers.

Our annual research program began in 2010, and now offers insights into the perceptions and motivations of over 59,000 investors from 31 countries around the globe.

About Natixis Investment Managers

Natixis Investment Managers serves financial professionals with more insightful ways to construct portfolios. Powered by the expertise of 26 specialized investment managers globally, we apply Active Thinking^SM to deliver proactive solutions that help clients pursue better outcomes in all markets. Natixis ranks among the world’s largest asset management firms⁴ (€830.8 billion / $997.8 billion AUM³).

Headquartered in Paris and Boston, Natixis Investment Managers is a subsidiary of Natixis. Listed on the Paris Stock Exchange, Natixis is a subsidiary of BPCE, the second-largest banking group in France. Natixis Investment Managers’ affiliated investment management firms and distribution and service groups include Active Index Advisors^®;⁵ AEW; AlphaSimplex Group; Axeltis; Darius Capital Partners; DNCA Investments;⁶ Dorval Asset Management;⁷ Gateway Investment Advisers; H2O Asset Management;⁷ Harris Associates; Investors Mutual Limited; Loomis, Sayles & Company; Managed Portfolio Advisors^®;⁵ McDonnell Investment Management; Mirova;⁸ Ossiam; Ostrum Asset Management; Seeyond;⁸ Vaughan Nelson Investment Management; Vega Investment Managers; and Natixis Private Equity Division, which includes Seventure Partners, Naxicap Partners, Alliance Entreprendre, Euro Private Equity, Caspian Private Equity;⁹ and Eagle Asia Partners. Not all offerings available in all jurisdictions. For additional information, please visit the company’s website at im.natixis.com | LinkedIn: linkedin.com/company/natixis-investment-managers.

Natixis Investment Managers includes all of the investment management and distribution entities affiliated with Natixis Distribution, L.P. and Natixis Investment Managers S.A.

In Canada: This material is provided by Natixis Investment Managers Canada LP.

¹ Natixis Investment Managers, Global Survey of Individual Investors conducted by CoreData Research, February-March 2017. Survey included 8,300 investors from 26 countries.
² Green-washing refers to the practice of companies selling investments under the banner of ESG, but not fully integrating ESG and sustainability into their investment approach.
³ Net asset value as of December 31, 2017. Assets under management (“AUM”), as reported, may include notional assets, assets serviced, gross assets and other types of non-regulatory AUM.
⁴ Cerulli Quantitative Update: Global Markets 2017 ranked Natixis Investment Managers (formerly Natixis Global Asset Management) as the 15th largest asset manager in the world based on assets under management as of December 31, 2016.
⁵ A division of Natixis Advisors, L.P.
⁶ A brand of DNCA Finance.
⁷ A subsidiary of Ostrum Asset Management.
⁸ A subsidiary of Ostrum Asset Management. Operated in the U.S. through Ostrum Asset Management U.S., LLC.
⁹ Caspian Private Equity is a joint venture between Natixis Investment Managers, L.P. and Caspian Management Holdings, LLC.