Active management continues to gain favor among institutional investors who predict higher volatility and asset bubbles in 2018, according to a Natixis Investment Managers' survey released Tuesday.
Among the 500 global institutional investors surveyed, 78% believe the stock market will be more volatile in 2018 and 70% think the bond market will be more volatile. Additionally, 77% of survey respondents said they are concerned that consistently low interest rates have created assets bubbles "where rapid price inflation far exceeds the fundamental value of the underlying asset." All of this adds up to an environment that favors active management, 76% of investors said.
"Investors are facing unprecedented challenges as central banks unwind the easy money policies that have dominated the markets since the financial crisis and prepare for the first challenging bond market in more than a generation," said David Giunta, president and CEO for the U.S. and Canada at Natixis Investment Managers, in a news release on the survey results. "As they plot their course, the majority of institutions tell us active management offers the most promising way to achieve key objectives in markets like these, such as providing downside protection, gaining exposure to non-correlated asset classes, taking advantage of short-term market movements and ultimately delivering better risk-adjusted returns."
According to 59% of investors, flows into passive investment strategies have artificially suppressed volatility. Another 56% said they believe the increase in passive investing has distorted stock prices, and 63% believe it has increased systemic risk.
Seventy-four percent of investors cited geopolitical events, such as the stability of the European Union, as the biggest potential threats to markets in 2018, followed by asset bubbles (65%) and interest rate increases (61%).
The biggest asset allocation moves in 2018 are expected to be increased allocations to alternatives — 39% plan to increase private equity, 36% want to increase private debt allocations, and 33% each plan to increase real estate and infrastructure investments. Only 14% of respondents plan to decrease their allocations to private equity; private debt, 6%; and real estate and infrastructure, 9% each.
Within equities, 33% and 27% plan to increase their allocations to European equities and emerging markets equities, respectively, while 36% plan to decrease their allocations to U.S. stocks. Only 11% of investors want to increase their allocations to U.S. equities, while 17% want to decrease their European equity investments and 15% want to decrease their emerging markets equity investments.
Within fixed income, 24% expect to increase their exposure to emerging market debt while 33% and 26% plan to decrease their exposure to high-yield corporate bonds and government-related debt, respectively. Twelve percent of investors expect to decrease their exposure to emerging market debt, while 14% plan to increase their exposure to high-yield corporate bonds and 16% plan to increase their allocations to government-related debt.
Also, 68% of investors' assets were actively managed in 2017; over the next three years, investors expect 67% of assets will be actively managed and 33% will be passively managed.
In a 2015 Natixis survey, investors predicted 57% of their assets would be actively managed and 43% would be passively managed over the next three years, compared to their 2015 levels of 64% and 36%, respectively.
Survey respondents pursue an average long-term investment return of 7.2%; 64% of investors plan to maintain their assumed rate of return in 2018, while 24% plan to lower it and 12% plan to raise it.