Many institutional investors are “seriously struggling with traditional asset allocation” and are concerned about correlation between stocks and bonds.
They said it is challenging to find diversification among traditional asset classes, according to Natixis Global Asset Management, which surveyed institutions with more than $35 trillion (€32.3 trillion) of assets under management.
Just over half of them said stocks and bonds were too highly correlated to provide distinctive sources of return and their top priority this year is to find better risk-adjusted returns from alternative investments.
John Hailer, chief executive officer for Americas and Asia and head of global distribution at Natixis GAM, said: “An investment approach that’s fit for modern markets is needed. Institutional investors are increasingly moving to a broader mix of non-correlated assets alongside traditional stocks and bonds.”
Two-thirds of the investors said that an effective way of easing risk was to increase allocations to non-correlated assets, including private equity, private debt and hedge funds. Nearly half said it was essential to invest in alternatives in order to outperform the broader markets.
Institutions worry about their ability to fund liabilities in a volatile, low-rate market. The survey found that managing volatility in investment returns was the greatest concern of investors from the UK (selected by 54% of respondents).
Eighty-four percent of institutions say the low-yield investing environment is their biggest concern for managing risk, followed by generating returns (82%) and funding long-term liabilities (72%). Nearly seven in ten (68%) say meeting growth objectives and short-term liquidity needs are a challenge to their organisation.
While costs are important and many will increase usage of passive strategies in more efficient asset classes, active strategies still hold favor for pursuing better returns overall, Natixis GAM said. Currently, 64% of institutional assets are managed actively and 36% are managed passively. Fifty-eight percent of investors say that, over the long term, active investments outperform passive ones. And, in the next 12 months, 67% say economic factors, changing monetary policies and market volatility will favor active managers.
The majority of institutional investors agree that active management is a source of alpha (87%), accessing non-correlated asset classes (77%) and taking advantage of short-term market movements (71%).
The survey also points to a rise in environmental, social and governance (ESG) investing. Half of the investors see ESG investments as a potential source of return and 95% said they were, to some extent, incorporating ESG strategies. More than four in ten of them do so primarily because it’s in their fund’s mandate.
The online survey was conducted in October 2015 with 660 senior decision makers working in institutional investment.
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