Roughly three-quarters of institutional investors expect stock market volatility to increase in 2018 and believe adding alternatives to their portfolios is important for mitigating risk, a survey from Natixis Investment Managers showed.
The survey found 78% of respondents expect volatility to increase this year. Also, 70% of respondents believe alternatives are important for helping diversify portfolio risk.
When asked which kinds of investments are best for diversification, the highest percentage — 47% — cited global macro strategies, followed by commodities (41%) and infrastructure investments (40%). When asked what their top choice is for fixed-income replacement strategies in the face of rising interest rates and the end of the bond bull market, the top response was infrastructure at 55%.
When asked what their top choice for generating alpha among alternatives was, the highest response was private equity at 72%. Institutional investors also said commodities and managed futures were their top choices for inflation-hedging strategies and volatility risk mitigation, respectively.
Meanwhile, 76% of respondents also said the current market favors active managers.
"The sudden return of market volatility is a healthy reminder that it's important to take a consistent approach to portfolio diversification," said David L. Giunta, CEO for the U.S. and Canada, in a news release announcing the survey results. "Institutional investors are increasingly turning to active managers and alternatives for the tools and flexibility to diversify their portfolios and mitigate risk."
Perhaps the biggest long-term risk concern among institutional investors, according to the survey, is managing longevity risk, with 85% of insurance firms, 78% of corporate pension plans and 76% of public pension plans citing that as a long-term risk.
The survey also asked institutional investors how they are applying environmental, social and governance strategies. Sixty-one percent of respondents, up from 52% in the 2016 survey, said their organizations integrate ESG factors into their fundamental processes.
When asked why they incorporate those factors into investment decision-making and analysis, 47% said "to align investment strategies with organizational values," 41% said to minimize headline risk, 32% said they were mandated by their investment policies and 29% said to generate higher long-term risk-adjusted returns. Respondents could give more than one answer.
In the 2016 survey, the top reason given for integrating ESG factors was because of firms' investment policies.
Despite the growing use of ESG factors, further education is required because only 14% of respondents see the full potential of ESG, the news release said.
The survey of 500 institutional investors was completed in September and October.
