The Best and Worst Asset Classes of 2016

It’s in with equity and out with bonds, according to a survey of institutional investors.

Institutional investors are hopeful about the stock market but fearful of volatility in 2016, according to a report by Natixis Global Asset Management.

Of the survey’s respondents, 77% said they expect equities to be the top-performing asset class next year. In particular, 42% of respondents favored global equities, while 33% preferred US equities. The S&P 500 gained 1.6% in 2015 to December 8, according to data provider FE Analytics, despite a turbulent summer.

“We’re seeing a surge in demand for innovative strategies that target specific needs across more diversified, complex portfolios.”Emerging market stocks were also well liked, cited as a potential top performer by 25% of investors. The MSCI Emerging Markets index lost 15% in dollar terms so far in 2015, according to FE Analytics.

However, investors said they were concerned about market volatility in 2016, labeling it the biggest risk to investment performance. In particular, respondents were worried about the effects on markets of political turmoil, economic problems in China, diverging international monetary policies, and changing interest rates.

Additionally, 84% of investors said they were concerned about the low-yield environment.

“Central bank policies, market volatility, and other outside events have a big influence on institutional investors,” said John Hailer, Natixis CEO.

As a result, investors said their primary goals for 2016 were balancing risk and return and managing volatility in investment returns. 

Currently, the average institution dedicates 42% of its portfolio to stocks, with 28% allocated to bonds and 25% in alternatives. Over the next year, investors said they plan to add non-correlated assets and private investments to diversify their portfolios and improve alpha.

“We’re seeing a surge in demand for innovative strategies that target specific needs across more diversified, complex portfolios,” Hailer said.

Another broad asset class that will perform well in 2016, according to the survey, is alternative investments, favored by 63% of respondents. A majority of investors said they believed alternative assets will perform better in 2016 than they have this year.

Half of the respondents said they will increase private equity holdings, while 48% said they plan to increase their stock allocation. Additionally, 46% said they will increase private debt, and 41% said they will invest more in hedge funds.

Meanwhile, 42% investors said they expect to cut their bond allocations—as bonds, along with commodities and fixed income, were selected as the worst performing asset classes for 2016.

Investors also said they intend to make portfolio adjustments when interest rates rise, with 65% planning to ditch longer-duration bonds for those with shorter durations. Other strategies for coping with interest rate changes were reduced overall bond exposures, increased use of alternative strategies, adoption of more absolute return strategies, and geographic diversification.

Related: The Argument for Private Equity & Can Bond Managers Cope with Higher Rates?