Global institutional investors agree it’s challenging to find diversification among traditional asset classes, with 54% saying that stocks and bonds are too highly correlated to provide distinctive sources of return, according to a new survey.
Natixis Global Asset Management surveyed 660 global institutional investors, including corporate, public and government pension funds, sovereign wealth funds, insurance companies, and endowments and foundations collectively managing more than $35 trillion in assets.
The survey found evidence that alternative assets are taking on new prominence within institutional portfolios to help generate better risk-adjusted returns.
Read: Alternative assets no longer considered alternative
“The events of the last month have shown the need for a sophisticated, balanced approach to asset allocation,” said John Hailer, chief executive officer of Natixis Global Asset Management in the Americas and Asia.
“That’s part of the reason institutional investors plan this year to supplement traditional stocks and bonds by making an even bigger commitment to non-correlated, alternative assets.”
Two-thirds (66%) of institutional investors taking part in the survey said they believe that an effective way of easing risk is to increase allocations to non-correlated assets, including private equity, private debt and hedge funds. Nearly half (49%) said it is essential to invest in alternatives in order to outperform the broader markets.
The survey also found that the low-yield investing environment is the biggest concern for managing risk, cited by 84% of respondents, followed by generating returns (82%) and funding long-term liabilities (72%). More than two-thirds (68%) said meeting growth objectives and short-term liquidity needs is a challenge to their organization.
Read: Four not-so alternative investments
While the survey found that costs are top of mind for institutions and that many will increase usage of passive strategies in more efficient asset classes, active strategies still hold favour for pursuing better returns overall. Currently, 64%
of institutional assets are managed actively and 36% are managed passively.
More than half (58%) of respondents said that, over the long term, active investments outperform passive ones. And, in the next 12 months, 67% expect economic factors, changing monetary policies and market volatility will be favourable for active managers.
The majority of institutional investors agreed that active management is a source of alpha (87%) and better for accessing non-correlated asset classes (77%) and taking advantage of short-term market movements (71%), while 90% said passive investing is best for minimizing management fees.
Read: Active and passive: A better marriage
Nearly three-quarters (72%) of institutional investors involved in the survey said they are concerned about their ability to fund long-term liabilities (LDI), and 68% said it is a challenge to manage uncertain liabilities linked to increased longevity.
Another three-quarters (73%) said they have tools to manage liability assets, and 78% said they are looking for more innovative LDI solutions for today’s markets.
“Institutions can’t afford to underestimate their future liabilities,” said Hailer. “And yet that’s a risk as populations age and beneficiaries live longer. Institutions need products that help them to better manage these types of long-term liabilities. The findings of our survey continue to suggest that more LDI innovation is needed to help investors address this issue.”