Survey: Institutional investors raising exposure to higher-risk assets in pursuit of better returns and yield
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Faced with volatility, greater risks and still-low yields, institutional investors are raising their exposure to higher-risk assets in pursuit of better returns, according to an international survey of institutional investors published today by Natixis Global Asset Management.
At the same time, these investors are doubling down on risk management to better balance long-term growth objectives and liquidity needs, but they say they need better ways of identifying risk across their portfolios.
“While risk factors change over time, the challenge for institutional investors remains to deliver long-term results while navigating short-term market pressures,” said David Giunta, President and CEO for the United States and Canada. “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.”
According to the survey, 62% of institutional managers 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. Instead they are increasing their exposure to equities and alternatives and turning to illiquid assets and the private markets for risk-managed return generation and yield replacement.
Natixis surveyed 500 managers of public and corporate pensions, foundations, endowments, insurance funds and sovereign wealth funds in North America, Latin America, the United Kingdom, Continental Europe, Asia and the Middle East. Collectively, they manage $15.5 trillion in assets. Data was gathered in October and November 2016 by the research firm CoreData. The findings are published in a new whitepaper, “Double Down.”
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The findings provide insight into how institutional investors, largely considered to be the world’s largest, smartest investors, are using risk to their advantage. Meanwhile, 75% of institutional investors think individual investors might be taking on too much risk in pursuit of yield.
Pursuing growth: Bigger role for real assets, alternatives
In examining their goals, 70% of investors believe their return expectations are achievable, but confidence may not be as strong as it seems on the surface. Half 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% 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% think most of their peers won’t. Sixty-nine percent agree that traditional diversification and portfolio construction techniques need to be replaced with new approaches.
The survey found:
- Sixty-seven percent of institutional investors think private equity provides higher risk-adjusted returns than traditional asset classes, and more than half (55%) believe private equity provides better diversification than traditional stocks.
- Seventy-three percent think private debt provides higher risk-adjusted returns than traditional bond investments. The three areas they consider most promising are infrastructure, healthcare and the sector combining technology, media & telecom. Many also say they are likely to consider increasing use of direct lending (44%) and collateralized debt (34%).
- About one-third (34%) of institutions 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% of institutional decision makers’ primary goal for investing in real assets is earning higher returns.
- Half of institutions report they are increasing exposures to alternative investment strategies this year. The adoption of alternative investments isn’t limited to growth portfolios, as 77% of respondents say alternatives have a role in liability-driven investing as well.
“Institutions are turning to risk assets to combat this extended period of historically low rates, but they also need strong ballast to keep them on course,” said Robert Hussey, Executive Vice President of the Institutional Services Group. “Even as they embrace risk, they have a plan for managing their exposure using the wide range of tools that are now available.”