Survey: Half of Institutional Investors Sleepless Over EU Contagion

Respondents globally think volatility is here to stay, and have changed their approaches to risk accordingly.

(September 26, 2012) – What do most institutional investors in Saudi Arabia, Spain, and the United States need the most? 

Uncorrelated assets and bottle of Ambien, according to a major survey of 482 pension, endowment, foundation, and sovereign wealth fund managers by Natixis Global Asset Management. The respondents oversee a median of $23 billion each in assets, and are based in the United States, United Kingdom, Middle East, Asia, and Europe. 

“Institutional investors are facing a near universal challenge: address increasing risk appetites while mitigating market volatility and preserving investment principal,” say Natixis analysts in the survey’s introduction. “In response, institutional investors are trying to build more durable investment portfolios that perform in both up and down markets to generate the returns they need. In today’s markets, this requires a bifurcated approach to investing. On the one hand, investors need to be more aggressive in seeking returns in a low-interest rate environment. On the other hand, they need to defend against elevated levels of risk in highly volatile markets.” 

The majority of respondents (84%) believe that instability creates investment opportunities, but nearly the same portion (81%) likewise admitted to struggling to control the negative impacts of volatility on their portfolios. The single most prevalent priority for these investors over the next year is to use strategies that limit exposure to market volatility. The most popular strategy: allocating to uncorrelated assets, which 91% of respondents said was the most effective way to temper instability. 

“A generation ago, diversification among asset classes, such as equities and fixed-income securities, was expected to ensure that only a portion of an investor’s portfolio lost value during a market decline,” Natixis analysts say. “Increasingly, however, various asset classes seem to move in lock-step, with correlation even appearing to grow during times of market stress. The implications of this correlation include both greater risk and lower returns…While there is uncertainty about why this phenomenon has occurred and whether it is a permanent fixture of a more volatile investment landscape, investors increasingly seek to reduce correlation among the assets in their portfolios.” 

More than half of the investors surveyed say traditional assets already are too highly correlated to provide distinctive sources of return. Alternative assets were seen as the best, well, alternative. Among respondents already invested in the class, 85% reported being pleased with the performance of these holdings.