Institutional investors are wary of the possibility of a new year dominated by fragile markets, but are confident that their portfolios are well-positioned, according to a new survey from Natixis Investment Managers.
Natixis Investment Managers’ Center for Investor Insight surveyed 500 institutional investors around the world who manage more than $19 trillion of assets for retirees, governments, insurance companies, and other institutions.
Some of the findings in this year’s survey were predictable. A majority of respondents (77%) said they worry that the prolonged low-interest-rate environment has created asset bubbles. Nearly six in 10 investors say that the lack of volatility in the market is also cause for concern. Perhaps most notable, however, were institutional investors’ views on passive investing, which were broadly negative. 59% of investors believe that the significant asset flows into passive products is suppressing volatility in the market. 56% said they also believe the increase in passive investing is distorting relative stock prices and creating systemic risks.
These concerns are bringing many investors back to actively managed funds. The survey shows that 2017 was the third consecutive year of declines in passive investing, as allocations dropped to 32%, compared to 36% in 2015. Investments in actively managed investments now account for over two-thirds of the overall portfolio (68%). Only 43% of investors surveyed 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.
Increasingly fragile markets prompt new allocations
Over the next year, allocators expect to make a number of changes to portfolios. 36% expect to cut back exposure to US equities in favor of European equities and emerging markets equities. 24% said they would also increase allocations to emerging market debt. Investors are broadly expected to cut exposures to domestic high-yield bonds and government debt.
Illiquid assets are also expected to see significant asset flows. 39% of investors said they planned to increase allocations to private equity, and 36% reported they plan to add to allocations to private debt. 61% of investors believe private equity provides better diversification than traditional asset classes, and 58% feel private debt provides better diversification than fixed-income vehicles. Overall, private debt investors are hot on the asset class, with seven in 10 noting that they wished more investment options were available. 85% reported being happy with the performance of their private debt investments to date.
Real estate and infrastructure followed closely behind private debt, with 33% of investors planning to add to their portfolios. Another 18% said they planned to increase allocations to hedge fund strategies in 2018.