Survey participants ready to shrug off the volatility, asset bubbles and fragile markets

Institutional Investor Survey Outlook for 2018

Institutional investors are wary of fragile market conditions, distorted asset prices and systemic risks caused by central bank interventions and the growing popularity of passive investments, but they are confident their own portfolios can weather the storm with only modest changes, according to new survey findings released today by Natixis Investment Managers.

To position their portfolios for the volatility they expect as central banks gradually remove the monetary life support system in place since the financial crisis, professional investors around the world are increasing allocations to non-traditional assets, including private equity, private debt, infrastructure and real estate, as they seek alternatives to bonds and hunt for higher returns in a crowded market.

Natixis Investment Managers’ Center for Investor Insight surveyed 500 institutional investors around the world who manage more than $19 trillion of assets for retirees, governments, insurance companies and other institutions. The survey found that 77% of respondents worry the prolonged period of low interest rates has created asset bubbles. Six in ten (59%) say the absence of volatility is a major investor concern, and 59% believe that volatility has been artificially suppressed by flows into passive investment strategies. More than half (56%) believe the increase in passive investing is distorting relative stock prices and creating systemic market risks (63%), which 72% believe individual investors aren’t yet aware of.

"Investors are facing unprecedented challenges as central banks unwind the easy money policies that have dominated the markets since the financial crisis and prepare for the first challenging bond market in more than a generation," said David Giunta, CEO for the US and Canada at Natixis Investment Managers. "As they plot their course, the majority of institutions tell us active management offers the most promising way to achieve key objectives in markets like these, such as providing downside protection, gaining exposure to non-correlated asset classes, taking advantage of short-term market movements and ultimately delivering better risk-adjusted returns."

According to the survey, key institutional investor expectations for 2018 include:

  • Active management continues to gain favor: Three-quarters of institutions overall (76%) agree the current market environment is likely to be favorable for active investment management in 2018, including 78% of pension funds and 79% of foundation and endowment managers. Looking for growth, institutional investors said they find active management is better suited to accessing emerging market opportunities (75%), providing exposure to non-correlated assets (74%) and implementing ESG strategies (68%). Nearly three-quarters (73%) say active management is also better at providing downside protection than passive strategies.
  • More volatility: Seventy-two percent of institutional investors say they are surprised volatility has been so low for so long, and most don’t think the trend will continue into 2018. Seventy-eight percent expect the stock market will be more volatile and 70% think the bond market will be more volatile next year.
  • Not so tiny bubbles: Investors’ reach for riskier assets in pursuit of higher yields has been a positive feedback loop, crowding investors into assets that many believe have become bubbles. Thirty percent of institutions think there is a stock market bubble, and 42%, including 60% in the UK, think there is a bubble in the bond market. Nearly two-thirds (64%) of institutional investors think bitcoin, the largest of the emerging cryptocurrencies, is a bubble – and the currency has appreciated more than 56% in the month since the survey was conducted. Seven in ten (71%) say both institutional and individual investors are taking on too much risk in the pursuit of yield.
  • Return of alpha: Sixty-nine percent of investors think stock correlations will remain at the same level or increase further in the year ahead, and 76% say alpha has been harder to come by as the markets have become more efficient. However, nearly half (46%) expect dispersion, or the spread between security prices, to increase in 2018. Seven in ten institutional investors (69%) say active management allows them to take advantage of short-term market movements.
  • Sector picks: More institutions (45%) expect the technology sector to outperform the market in 2018 than any other sector, followed by healthcare (44%), defense/aerospace (43%) and financials (41%).

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