Institutional investors believe that geopolitical and economic events could increase market volatility in 2017, according to a survey by Natixis Global Asset Management. As a result, asset owners plan to reset their portfolios, relying on active management and alternative assets as they seek to manage risk and boost returns.
Natixis surveyed decision-makers at 500 global institutional investors on their market outlook and asset allocation plans for 2017 and beyond. Volatility topped the list of concerns for 2017, with 65% pointing to geopolitical events, 38% citing the U.S. elections and 37% noting the potential for changing interest rate policies.
In anticipation of higher volatility, institutional investors favor active management over passive, according to the survey. They also expressed concern over the market distortions caused by passive investing.
Of the investors surveyed, 73% said the current market environment is likely favorable to active management, while 78% are willing to pay a higher fee for potential outperformance.
Meanwhile, nearly half — 49% — said passive investing distorts relative stock prices and risk-return trade-offs, while 64% said active management provides better risk-adjusted returns than passive.
Over the longer term, institutions project they will use passive investments less than they previously believed. They say 67% of their assets are actively managed and 33% are in index-tracking investments, and they expect the share of passive investments to rise only 1 percentage point, to 34%, in the next three years. In a 2015 Natixis survey, investors expected 43% of assets would be passively managed within three years.
Half of the global institutional decision-makers surveyed plan to increase their use of alternative strategies in 2017, raising their allocations to 22% from 18% of assets, with 67% using them for diversification and 31% for risk mitigation.
The survey also found that institutional investors plan to equity allocations slightly, to 36% from 34%, and dial back on fixed income, to 32% from 35%.
Among stocks, the highest percentage, 39%, of investors predict emerging markets equities will be the biggest gainers next year. Within alternatives, 32% say private equity will do the best. And among bonds, 53% think high-yield issues will outperform.
On the other hand, 41% of investors say U.S. stocks are most likely to underperform. For bonds, 67% cited medium- to long-term government bonds as likely to underperform, and among alternatives, 29% said real estate could trail the pack.
Institutions predict financials will be the best-performing stock sector in 2017, while utilities could deliver the biggest disappointment. In private equity, the best sectors will be media and telecommunications, infrastructure and health care, according to respondents.
The responses also showed that institutional investors' confidence suffered after the U.S. election. Natixis conducted the survey in two stages, with 340 investors polled just before the U.S. presidential election on Nov. 8 and 160 responses collected just afterward.
Prior to the election, two-thirds of respondents expressed confidence in their organization's ability to handle the risks associated with investment performance, which fell to only 53% among those surveyed after the election.
The outlook for U.S. and emerging markets stocks also changed substantially after the election. Forty-three percent of investors surveyed before the election said emerging markets would be the best-performing equity market in 2017 compared to 31% of those surveyed after the election.
Meanwhile, 46% of those surveyed before the election said the U.S. would be the biggest disappointment among global stock markets, compared with 31% of those surveyed afterward. The proportion of investors who said longer-term government bonds would be the most disappointing fixed-income asset class in 2017 rose to 76% after the election from 63% before.
The results of the survey are available on Natixis' website.