A study led by Natixis Global Asset Management has found out institutional investors are worried about the current low-yield environment and turn to alternatives for better returns.
The survey of 660 institutional investors includes corporate, public and government pension funds, sovereign wealth funds, insurance companies, and endowments and foundations collectively managing more than $35trn (€32.2trn) in assets.
Some 80% of institutions interviewed say the low-yield environment is their biggest concern for managing risk, followed by generating returns (82%) and funding long-term liabilities (72%).
Natixis’ research reveals around seven in ten institutional investors (68%) say meeting growth objectives and short-term liquidity needs are a challenge to their organisation.
“These findings illustrate the dilemma faced by institutional investors, who are forced to call into question their traditional portfolio management techniques in order to respond to the challenges of an increasingly complex and turbulent financial environment,” explained Christophe Point, head of Natixis Global AM Distribution for France, French-speaking Switzerland and Monaco.
“They are aware that they have to review their portfolio construction approach to maximise diversification and reduce risk,” he added.
Institutional investors consider it is challenging to diversify investments among traditional assets classes with 54% assessing stocks and bonds remain too highly correlated to generate distinctive sources of return.
Therefore they turn to alternative strategies with the aim of generating better riskadjusted returns.
Natixis’ study shows two-thirds (66%) of institutional investors believe that an effective way of easing risk is to increase allocations to non-correlated assets, including private equity, private debt and hedge funds.
Almost half (49%) answer it is essential to invest in alternatives in order to outperform traditional markets.
“In the current market, traditional asset allocation has become a zero-sum game,” said John Hailer, head of International Distribution and CEO of Natixis GAM Americas and Asia.
“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,” Hailer commented.
Active vs Passive
Active strategies are still favoured by institutions as 64% of institutional assets are currently managed actively whilst 36% are managed passively.
Active management forms a source of alpha to 87% of institutional investors surveyed. Also active managers better access non-correlated asset classes (77%) and take advantage of short-term market movements (71%).
Over the long term, 58% of investors believe active funds will outperform passive ones. Institutions show optimism as 67% of them say that over the year, economic factors, changing monetary policies and market volatility will favour active managers.
“Institutions are increasingly moving towards a broader mix of active and passive investment management strategies in their portfolios, aware of their respective advantages,” argued Point.
Ability to funding long-term liabilities are a concern to 72% of institutions. For 68% of them, it is a challenge to manage uncertain liabilities linked to increased longevity.
“As the population ages and people live longer, underestimating future liabilities is a significant risk for institutional investors,” Hailer said.
“Institutions are expressing growing demand for product improvements to better manage long-term liabilities. The findings of our survey continue to suggest that LDI innovation is not keeping up with the demands of institutional investors.”
Achieving alpha has become increasingly difficult according to 64% of institutional investors surveyed.
Half of them consider ESG investments as generating potential returns and 51% say ESG assessments help mitigate headline-making risks.
Most institutional investors (95%) are to some extent incorporating ESG strategies and 41% explain they have to do so because their fund’s mandate requires it.