Institutional investors are turning to riskier assets for better returns in order to cope with the current environment of low yields and volatile markets, according to a new study by Natixis Global Asset Management.
Its survey of 500 global institutional investors with $15.5 trillion in assets found while increasing their exposure to riskier assets, organizations are still paying attention to potential risks across their portfolio and looking at how they can balance long-term growth with liquidity needs.
The study also noted that 62 per cent of institutional managers think they can handle short-term market risk, although they’re not relying on traditional portfolio strategies to meet their performance goals. Instead, investors are increasing their exposure to equities and alternatives, as well as illiquid assets and the private markets, to generate returns.
“While risk factors change over time, the challenge for institutional investors remains to deliver long-term results while navigating short-term market pressures,” said David Giunta, president and chief executive officer for the United States and Canada at Natixis Global Asset Management. “Given their mandates, avoiding risk is not an option for institutional investors. They have to beat the odds or change the game, and they are doing so by balancing risks and embracing alternatives to traditional 60/40 portfolio construction, but always with an eye on their long-term objectives.”
According to the study, 50 per cent of institutional investors expect to decrease return assumptions in the next 12 months because of current challenges in the market, while 75 per cent of those surveyed believe it’s harder to generate alpha and 69 per cent think organizations need to take new approaches, instead of relying on traditional techniques of diversification and portfolio construction.
“Canadian institutional investors continue their quest for sources of alpha and may turn to private assets to combat this extended period of historically low rates,” said Abe Goenka, chief executive officer at Natixis Global Asset Management Canada. “Even as they embrace the risk, they have a plan for managing their exposure using a wide range of diversification strategies.”
Interestingly, institutional investors noted environmental, social and governance factors are a key strategy for growth and risk management. Fifty-eight per cent of investors surveyed said considering those issues is a way to generate alpha and the same percentage noted it can help reduce risks from lawsuits, environmental harm and social discord. What’s more, 62 per cent believe practices around environmental, social and governance factors will become the norm for all managers in the next five years.
The survey also looked at investors’ appetite for certain asset classes and found 67 per cent think private equity brings higher risk-adjusted returns than traditional areas and 55 per cent prefer it to traditional stocks. The three areas investors find most promising are infrastructure, health care and the technology, media and telecommunications sector.
Similarly, 73 per cent of investors favour private debt over traditional bonds, and many said they’re likely to increase their use of direct lending (44 per cent), collateralized debt (34 per cent) and special situations (34 per cent). Additionally, about 34 per cent report they’re planning to increase allocations to real assets in the next 12 months and 50 per cent are boosting exposures to alternative investments for growth and as part of liability-driven investing strategies.
While investors have an appetite for alternatives, 55 per cent reported their need for liquidity has limited their ability to invest in that area. Also, 71 per cent of investors believe regulators’ solvency and liquidity requirements have resulted in a greater bias towards shorter time horizons and more liquid assets.