Big investors are lifting their exposures to risk assets but a lot of them – about half – think they will also have to reduce their return expectations going forward, according to the latest survey of institutional investors by the multi-affiliate manager Natixis Global Asset Management.
The survey, conducted late last year by the Sydney-based research firm CoreData, also shows how big investors are using risk to their advantage. More are using alternatives, including illiquid assets, to manage risk and increase alpha.
The global survey of 500 funds and managers, including Australian funds and involving about 7,500 individual respondents, says that they are looking for better ways to identify the risks across their portfolios. The institutions surveyed account for about US$15 trillion in assets.
According to Kevin Haran, the Natixis managing director for Australia and New Zealand, while risk factors change over time, the challenge for institutional investor remains to deliver long-term results while navigating short-term market pressures.
“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,” he says.
In examining their goals, 70 per cent of investors believe their return expectations are achievable, but confidence may not be as strong as it seems on the surface. A total of 50 per cent of the institutions expect to decrease return assumptions in the next 12 months. One reason for setting their expectations lower is the challenge of finding returns: 75 per cent of those surveyed say alpha is becoming harder to come by as markets become more efficient.
While most are confident they’ll be able to meet their long-term liabilities, 62 per cent think most of their peers won’t. A total of 69 per cent agree that traditional diversification and portfolio construction techniques need to be replaced with new approaches.
Meanwhile, 75 per cent think investors might be taking on too much risk in pursuit of yield but 62 per cent feel they can handle near-term market risk despite greater volatility, which they say poses the biggest risk to their performance.
Their top organizational concern, however, is low yield. Given the prospect for greater volatility and persistence of low interest rates, few institutions are relying on traditional portfolio strategies to meet their performance goals.
In their efforts to manage the risks, they believe the more effective techniques include risk budgeting (87 per cent), diversifying holdings across sectors (86 per cent), currency hedging, (78 per cent), and increasing their use of alternative investments (76 per cent).
The survey reveals that the percentage of institutions using alternatives to manage risk has jumped from 53 per cent in 2015 to 76 per cent today. In addition, 56 per cent report that their organisation is investing in more in illiquid assets today than they were three years ago.
Haran said that, from an Australian and New Zealand perspective, investors believed that the uncertainty in the world would lead to greater volatility among markets and they needed to ensure that their risk systems were both able to handle this and enable them to take advantage of the opportunities.
When markets were more volatile, he said, people tended to have different expectations. A wider disparity of views also provided more opportunities for active management, he said.
The main geopolitical concern for Australian investors was the outlook for China, he said, coupled with the ramifications of the Trump administration in the US, including currency management.
Survey highlights include:
- 67 per cent per cent of investors think private equity provides higher risk-adjusted returns than traditional asset classes, and 55 per cent believe private equity provides better diversification than traditional stocks
- 73 per cent think private debt provides higher risk-adjusted returns than traditional bond investments. The three areas they consider most promising are infrastructure, healthcare and the technology, media and telecom sector.
- About one-third report that they are planning to increase allocations to real assets, including real estate, infrastructure and aircraft financing, in the next 12 months. As seen with their broader views on private markets, 63 per cent of institutional decision makers’ primary goal for investing in real assets is earning higher returns.
- 56 per cent report they are increasing exposures to alternative investment strategies this year. The adoption of alternative investments isn’t limited to growth portfolios, as 77 per cent of respondents say alternatives have a role in liability-driven investing as well.