Facing rising market volatility and continued low yields, institutional investors are taking new measures to ensure their return objectives are met.
Increased allocations to risky assets, active managers, and outsourced CIOs are just a few of the trends highlighted by Natixis Global Asset Managements annual survey of institutional investors, which included responses from 500 pension plans, endowments, foundations, insurers, and sovereign wealth funds managing a collective $15.5 trillion.
The challenge for institutional investors remains to deliver long-term results while navigating short-term market pressures, said David Giunta, the firms North American CEO, in a statement accompanying the results. 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.
The survey found that investors planned to increase allocations to equities in 2017, while decreasing fixed-income holdings. Half of the respondents said they would boost their exposures to alternatives, while another 34 percent reported plans to invest more in real assets such as real estate and infrastructure.
Almost three-quarters said they believed the current market environment favored active management, up from 67 percent in 2015. While investors still anticipated a shift to passive investments over the next three years, the size of the projected shift fell: Instead of the 7 percent increase predicted in last years survey, investors estimated a rise of just 1 percent.
Meanwhile, actual allocations to active investments increased over the year, from 63.9 percent in 2015 to 67.2 percent in 2016.
Investors have also embraced outsourcing as a method of meeting return targets, with 41 percent assigning outsourced CIOs at least a portion of their portfolio and an additional 13 percent considering outsourcing. On average, these institutions turned over 37 percent of their total portfolio, citing motives including access to specialist capabilities and expertise and a desire for better performance.
Overall, most investors (70 percent) still believed their return expectations were achievable, even though three-quarters said alpha has become harder to find.
This self-confidence did not extend to views of their fellow investors, however, with 62 percent responding that most of their peers would not meet their long-term liabilities. Half of investors surveyed said they expected to decrease return assumptions over the next twelve months.