Two out of three institutional investors globally are confident about their approach to risk management, but a clear majority also expects challenges from volatile markets and rising inflation over the next three years, as well as lower yields, according to a survey by Natixis Global Asset Management released June 10.
The third annual survey found 90% of respondents were concerned about lower returns and yields, while 88% said reaching their total return objectives will be difficult — although 89% believe they'll meet their future obligations. Natixis earlier this year surveyed more than 500 institutional investment consultants and institutional investors with a combined $11.5 trillion in assets.
“There's a bit of a dichotomy there,” said Robert Hussey, executive vice president, institutional services, U.S. distribution at Natixis in Boston. “(Investors) feel that the equity piece has been a big contributor over the past year, but there certainly are gremlins out there in the market, and they're concerned about how to attack those gremlins.”
Mr. Hussey said the biggest concern he's heard among institutional investors is the potential “velocity of volatility” spurred by anything from geopolitical events to Federal Reserve rate movers that could “make the best-laid plans of risk management somewhat irrelevant; the fear of an abnormal market's effects on a strategic plan.”
Six in 10 investors globally — and 88% in the U.S. — agree that traditional asset allocation and portfolio construction techniques aren't well-suited for current markets. Additionally, more than 70% said that setting asset allocations and taking tactical advantage of market movements are difficult — although 60% of those surveyed also indicated they wanted to increase allocations to less-liquid alternative investments.
“(Investors are) kind of in conflict,” said Mr. Hussey, although he added the survey results show institutional investors are “more comfortable with the place of alternatives in their portfolio as a diversification tool, and their ... use of global equities.”
Fifty-eight percent of those surveyed plan to add to their global equity holdings in 2013, with 46% adding to emerging markets stocks and 42% increasing domestic stocks. Also, 27% of all respondents said global equities will be the best performer this year, followed by 19% for domestic stocks and 15% for emerging markets equities.
In fixed income, 43% say they plan to scale back on their domestic exposure in 2013 and 42% will reduce their global allocations. Among U.S. investors, 29% said they will reduce their domestic bond allocations.
Natixis conducted telephone interviews in January and February with officials from 189 corporate pension plans, 109 public pension plans, 43 sovereign wealth funds, 35 insurance companies, 18 endowments and foundations, 11 fund-of-fund companies and 97 investment asset consultants. Those surveyed were in 19 countries throughout North and South America, Europe, Asia and the Middle East.