About three-quarters (73 per cent) of global institutional investors ranked interest rates as a key portfolio risk, according to a new survey by Natixis Investment Managers.
The survey, which polled 200 chief investment officers and investment team members at life, property and casualty and reinsurance companies in Asia, Europe and North America, found concerns about interest rates are strongest in France, Germany and the United States.
Across all respondents, geopolitics ranked third among top concerns, with the pressure felt most directly in the U.S. (65 per cent) and the U.K. and Ireland (53 per cent). In addition, six out of 10 survey respondents cited fears of an economic slowdown among their top portfolio concerns. This includes nine out of 10 insurers in the U.S., seven out of 10 in Germany and three-quarters of those in Asia.
Some 81 per cent of respondents said the current environment makes it challenging to meet long-term return assumptions, including 26 per cent that said it’s very challenging. Three-quarters said asset-liability matching is challenging. All of these concerns ranked higher than managing liabilities (57 per cent) and managing longevity risk (53 per cent).
The survey also found 75 per cent of all respondents believe it’s essential to invest in alternatives in order to diversify portfolio risk. Most frequently, the respondents deploy alternatives to diversify portfolios and lower correlations (62 per cent). More than half (53 per cent) also said they’re using alternative assets to replace fixed income assets in their portfolios. And almost the same percentage (51 per cent) also said they look to alternatives to help provide alpha.
Beyond investing in alternatives, 46 per cent of survey respondents said they’re diversifying by sector or geography. They’re also adjusting bond allocations by shifting from investment grade to high yield (38 per cent), increasing exposure to credit (36 per cent) and shortening the duration of their holdings (28 per cent).
For most survey respondents, private investments are a key part of the picture. Among this asset class, real estate ranked at the top of the list, with 70 per cent reporting allocations, followed by private equity (62 per cent), private debt (58 per cent) and infrastructure (46 per cent). Smaller percentages said they have holdings in insurance-linked securities (18 per cent) and other private assets (four per cent).
In addition, the survey found nearly all (93 per cent) respondents believe they’re well prepared for the changing regulatory environment. Globally, the majority said these requirements are orienting their portfolios towards low-yielding fixed income assets. Sixty per cent said increased capital and valuation requirements are negatively affecting the level of diversification in their portfolios.
However, two-thirds said it’s a real challenge to generate alpha while also meeting regulatory requirements. This frustration is the highest in the U.S., where three-quarters said they find it hard to address this challenge, followed by France (70 per cent) and Germany (67 per cent).
Some 89 per cent of survey respondents said regulations are stopping them from investing in higher-risk assets. In both France and Germany, 97 per cent said regulation deters them from investing in the alpha-producing assets they need to meet liabilities. This represents a significant rise compared to Natixis’ 2015 survey, when about three in five respondents said regulation and capital requirements are frustrating their attempts to invest in new and alternative asset classes.
Another risk cited by institutional investors is climate change, with half saying it’s a challenge for their organization. Two-thirds went so far as to call it a core business issue or that they’re starting to consider it a core business issue.
Almost half (46 per cent) said climate has resulted in changes to their investment policy. However, there’s little consensus in how environmental, social and governance factors are implemented, with exclusionary screens (17 per cent), integration into existing process (16 per cent) and best-in-class selection (12 per cent) the most frequently cited.
While 31 per cent of survey respondents said they don’t yet incorporate ESG into their investment process, that number is likely to rise in time as companies look to grapple with concerns over climate-related losses (39 per cent), increased liabilities (25 per cent) and health impacts (24 per cent).