The majority of global institutional investors are expecting 2018 to bring more volatility in both the stock (78 per cent) and bond markets (70 per cent), according to a new survey by Natixis Investment Managers.
“They do anticipate volatility coming back to the market, and they’re really trying to make sure they’re positioned for when it happens,” says Dave Goodsell, executive director of Natixis’ Center for Investor Insight.
Read: Is latest market volatility a sign of the correction investors have been waiting for?
Most investors appear ready, with 70 per cent of respondents agreeing it’s necessary to invest in alternatives to diversify portfolio risk. For example, 55 per cent said they’re looking at infrastructure to provide a source of stable income, while 72 per cent said they’re considering private equity for generating alpha. That’s particularly telling, says Goodsell. “It shows that they’re seeing alternatives as the workhorse of the portfolio right now.”
Another trend this year is the integration of environmental, social and governance factors, with 61 per cent of respondents integrating them into their fundamental processes. That’s up from 52 per cent in the 2016 survey.
Read: Two-thirds of institutional investors use ESG analysis
Nearly half (47 per cent) of respondents said they’re trying to align their environmental, social and governance strategies with their organizational values, and 41 per cent said they’re using them to minimize headline risk. “We’ve seen plenty of examples of ESG incidences that have caused certain stocks to have problems,” says Goodsell. “I think [institutional investors] see these tools as a way of mitigating those problems for their portfolios. If you’re paying attention on those levels, maybe you’re not going to have those surprises.”
Investors expect the integration of environmental, social and governance factors to increase. The survey found 61 per cent of institutional investors believe it’s going to be standard practice across their portfolios within the next five years.
However, reporting on the integration of such factors remains a challenge. According to the survey, 45 per cent of respondents find it difficult to measure the financial and non-financial performance of environmental, social and governance factors, and 39 per cent believe there’s a lack of proven results.
Read: How Bâtirente takes ESG reporting to the next level
Still, Goodsell remains positive. “In the past, we’ve seen concerns over [tracking, but] that’s improved, too,” he says, referring to new tools for evaluating the impact of environmental, social and governance factors.
The survey also pointed to an uptake in outsourcing. Some 44 per cent of institutional investors outsource at least some part of their investment management function, while 17 per cent said they’re considering doing so in the next year, up from 13 per cent in the 2016 survey.
Goodsell says investors are willing to outsource to get expertise as they look at more specialized investment strategies. “It’s an important step if you want to be in those classes. You want to make sure you have people who are very confident and have expertise and experience with it.”
Investors, it seems, are preparing to ride out the wave of volatility that 2018 may bring. “They’ve seen this potential for volatility coming for a few years,” says Goodsell.
Read: Rising interest rates, inflation to cause more volatility in 2018