Institutional investors confident about risk management despite anticipating challenges
Institutional investors around the globe say they have a better handle on risk, but most worry about the challenges of rising volatility, inflation and low yields, according to a study by Natixis Global Asset Management (NGAM).
Many institutional investors are exploring new investment strategies and currently favour global and emerging market stocks, as well as real estate and private equity.
“While markets have seen positive growth and less volatility, institutional investors still anticipate potential risks as a major challenge,” says John T Hailer, chief executive officer of Natixis Global Asset Management in the Americas and Asia. “They’re confident, but at the same time acknowledge that they need to manage risk more effectively.”
Two-thirds (65 per cent) are confident in their risk management approach, including 85 per cent in the US.
However, many institutional investors anticipate being challenged by severe market swings (75 per cent), rising inflation (64 per cent) and lower yields/weaker returns (90 per cent).
A vast majority (88 per cent) say meeting their total return objectives will be difficult.
Six in 10 (60 per cent) investors globally – and 88 per cent in the US – agree that traditional asset allocation and portfolio construction techniques are not ideal for today’s markets.
Most (89 per cent) institutions believe they’ll meet their future obligations, but 70 per cent globally and 81 per cent in the US say individuals saving for retirement will fall short.
Well over half of institutional investors (58 per cent) plan to add to their global equity holdings in 2013, followed by emerging market stocks (46 per cent).
More than 70 per cent say setting strategic asset allocation and taking tactical advantage of market movements is challenging.
Most (60 per cent) plan to increase their allocations to alternatives, and believe they will perform better in 2013 than they did last year.
The results, released by NGAM’s Durable Portfolio Construction Center, include insights from more than 500 institutional investors that collectively manage more than USD11.5trn in assets.
Five years after the financial crisis upended markets, many institutional investors say the old rules of investing no longer apply in today’s markets. In the US, institutional investors (88 per cent) feel strongly that traditional portfolio construction and diversification strategies aren’t ideal for most investors, and 60 per cent of global institutions agree. Additionally, more than 70 per cent, including a high concentration of sovereign wealth funds, say that setting asset allocation and taking tactical advantage of market movements is difficult.
“The old road map no longer guides investors, and the new one is being drawn every day,” says Hailer. “They need more tactical help with portfolio construction and asset allocation so they can build stronger, more durable portfolios that can better withstand the cycles.”
While 89 per cent of institutional investors are confident in their ability to meet their own future obligations, that confidence does not extend to individuals saving for retirement. A large majority of institutions (81 per cent) in the US say the average citizen won’t have enough assets in retirement, and seven in 10 (70 per cent) globally say the same – a powerful message considering that many respondents manage retirement assets professionally. Institutional Investors expressed greater concern in Latin America (88 per cent) and the UK (84 per cent).
The widespread attraction to equities continues, with investors particularly drawn to global stocks. Asked to project which asset class will perform best this year, the top choice was global equities (27 per cent), followed by domestic stocks (19 per cent) and emerging market equities (15 per cent).
This optimism is reflected in most investors’ allocation plans for 2013, as 58 per cent plan to increase their exposure to global stocks, 46 per cent will add to their emerging market equity holdings and 42 per cent will increase their weighting in domestic stocks.
“Institutions are mindful that they need to meet both short- and long-term objectives, and they see stocks – particularly those beyond their own borders – as the best way to achieve that balance,” Hailer says.
Lower yields have made the risk-reward tradeoff of bonds less appealing for many investors, as 43 per cent say they plan to scale back on their domestic bond exposure in 2013 and 42 per cent will reduce their global bond allocations. US investors are slightly more optimistic within their own borders, with only 29 per cent saying they will reduce their domestic bond allocations. Investors worldwide are bearish on gold and cash, as more than 80 per cent anticipate lowering or maintaining their current allocations to each.
Most believe alternatives are essential to managing risk, and are adjusting their portfolios accordingly. Institutional investors have an above-average comfort level with alternative assets such as hedge funds, real estate, private equity and commodities. A large majority (85 per cent) report that they own alternatives, and three in four say it is essential to invest in these strategies in order to diversify portfolio risk.
Most (60 per cent) plan to add to their alternative investments, or other assets that don’t correlate with the broader market, in the next 12 months, with the most popular target areas being real estate (41 per cent), private equity (36 per cent) and infrastructure (30 per cent).
Most are also bullish on the near-term performance prospects for alternatives, with 71 per cent predicting that the assets they own will perform better in 2013 than they did last year. Institutional investors in the US are more cautious, with less than half (48 per cent) projecting better year-over-year performance.
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