With global institutional investors expecting political and economic events to increase market volatility in 2017, many are looking to alternative assets and active management in order to manage risk and boost returns, according to a new survey by Natixis Global Asset Management.
The survey, which included responses from 500 global institutional investors, found respondents are concerned about volatility from geopolitical events (65 per cent), the U.S. election (38 per cent) and the potential for changes to interest rate policies (37 per cent).
“In these volatile markets, institutions are going to be looking to active management to strengthen their returns and manage risk,” says Abe Goenka, chief executive officer of Natixis Global Asset Management in Canada.
“Compared to our survey last year, where investors expected 43 per cent of assets would be passively managed, now what we’re seeing is they’re actually looking to increase their asset allocation to active.”
Indeed, the survey found 73 per cent of investors think the current market environment is likely favourable to active management and the majority of respondents (78 per cent) are willing to pay a higher fee for the potential to outperform.
As for asset allocations, half of institutional investors surveyed are planning to increase their use of alternative strategies in the coming year, with alternative investment allocations expected to rise to 22 per cent in 2017 from from the current 18 per cent.
On the other hand, fixed-income allocations will decrease to 32 per cent from 35 per cent, while equity allocations will increase slightly to 36 per cent from 34 per cent, according to the survey.
“The biggest trend is this move at looking at alternatives as a way to diversify risk,” says Goenka. “We think that diversification and access to new investment opportunities are the key focuses.”
According to the survey, emerging market equities, private equity and high-yield issues are expected to do the best next year, while U.S. stocks and medium- to long-term government bonds will be disappointing. As for alternative investments, 29 per cent think real estate will trail other options.
“I think it’s a reflection of where we are in the interest rate cycle,” says Goenka. “Real estate tends to be highly sensitive to interest rates and also it’s been a great performing sector, so the opportunities in real estate may be limited going forward.”
In terms of sector outlooks, investors think utilities will deliver the biggest disappointment in terms of stocks, while media and telecommunications, infrastructure and health care will be the best areas to explore private equity.