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Institutional investors taking on more risk to meet returns — Natixis survey

Institutional investors are raising their exposure to riskier assets in the pursuit of better returns even as they attempt to increase their efforts to manage risk in order to balance liquidity and long-term growth objectives, according to a survey from Natixis Global Asset Management.

Seventy percent of the 500 decision-makers at global tax-exempt institutional funds representing $15.5 trillion in assets surveyed in November believe their return expectations for 2017 are achievable, although 75% of respondents believe investors “might be taking on too much risk in pursuit of yield,” according to a news release on the survey results.

When asked what the top challenge to their organizations will be in 2017, the most cited, at 60% of respondents, was balancing growth objectives and short-term liquidity needs. Forty-six percent said the top challenge is gaining a consolidated view of portfolio risk, while 39% said complying with new regulations.

“While risk factors change over time, the challenge for institutional investors remains to deliver long-term results while navigating short-term market pressures,” said David Giunta, Natixis' president and CEO for the U.S. and Canada, in the news release. “Given their mandates, avoiding risk is not an option for institutional investors. They have to beat the odds or change the game, and they are doing so by balancing risks and embracing alternatives to traditional 60/40 portfolio construction, but always with an eye on their long-term objectives.”

Seventy-one percent of respondents said the potential returns of illiquid alternatives make them worth the increased risk, and 56% of respondents said they are embracing illiquid assets more than they did three years ago. Fifty-five percent, meanwhile, said that liquidity concerns limit their funds' allocations to alternatives.

Some 50% of respondents said market volatility is the biggest risk to investment performance in 2017, while 43% cited geopolitical risk and 38% cited interest rates. The biggest concern in risk management for respondents is a low-yield environment, with 67% of respondents citing that as a concern, followed by 48% who cited interest rates and 34% who cited the ability to fund long-term liabilities.

Survey respondents consisted of public and corporate pension funds, foundations, endowments, insurance funds and sovereign wealth funds in North America, Latin America, the U.K., continental Europe, Asia and the Middle East.

The results are published in a white paper on Natixis' website.