Global institutional investors are considering different portfolio constructions to ensure outperformance in what they increasingly worry is a lower return environment, according to a new survey by Fidelity Investments.
The survey, which polled 905 institutional investors in 25 countries with combined assets under management of US$29 trillion, found investors with at least $1 billion in AUM expected to make the largest changes to their asset allocation between 2019 and 2025, compared to smaller investors. The changes, the survey noted, could include boosting investments in active and non-traditional passive investment strategies, such as factor-based and non-cap weighted strategies, as well as alternatives and unconstrained strategies and derivatives.
Among those surveyed, 21 per cent said their biggest concern about market conditions is a low-return environment, while 17 per cent said they’re worried about volatility.
“Institutions realize that in the long term, market activity may no longer be enough to generate returns, so they have to work smarter to reach their goals,” said Jeff Mitchell, chief investment officer at Fidelity Institutional Asset Management, in a press release. “Institutions are restructuring their portfolios to reflect this changing investment ecosystem.”
The survey also found larger institutional investors are more likely than smaller ones to decrease their asset allocation in traditional passive strategies. As well, more larger investors said they expect to expand their investments in private equity and infrastructure, compared to smaller investors. However, across the board, survey respondents said they plan to reduce their equity investments in developed markets in favour of emerging markets.
While smaller institutional investors said they aren’t expecting to increase their involvement in actively managed strategies as much as larger investors, the survey found they’re already well exposed to those investments: 58 per cent of smaller investors said they had allocations in active strategies, compared to 44 per cent of all those surveyed.
Further, 62 per cent of institutional investors said they believe technological advances, such as quantitative investment strategies and high frequency trading algorithms, will make the markets more efficient.