Institutions focusing on alternative investments, ESG and risk management

Institutional Investor Survey Report

Volatility finally roared back to abnormally tame markets, but most institutional investors were already bracing for impact; their efforts to diversify and build durable portfolios may now pay off, according to new survey findings released by Natixis Investment Managers. Seventy-eight percent of institutional investors expected stock market volatility to spike in 2018, and they are making opportunistic allocations to active management and alternative investments in order to help meet average long-term return assumptions of 7.2% this year.

The Natixis Center for Investor Insight surveyed 500 institutional investors around the world to gain insight into how they are balancing long term objectives with short term opportunities and pressures. Seven in 10 investors agreed that the addition of alternatives is important for diversifying portfolio risk. Yet they see a number of alternative strategies playing distinct roles in their portfolios.

When asked to match the most appropriate alternative strategies with specific portfolio objectives, institutional investors indicated the following:
 
  • Diversification: Institutional investors most commonly cite global macro strategies (47%), commodities (41%) and infrastructure (40%) investments as best for diversification.
  • Fixed-income replacement: Top choices for providing a source of stable income as interest rates rise and the 30-year bond bull market ends include infrastructure (55%) and private debt (47%).
  • Volatility management: Institutions cite managed futures (46%) and hedged equity (45%) as best suited to manage volatility risk.
  • Alpha generation: Traditional markets have generated attractive returns, but institutions see opportunity to outperform. Seven in 10 (72%) cite private equity as their top choice among alternatives for generating alpha. They also see hedged equity (45%) as useful in meeting this objective.
  • Inflation hedge: Institutions view commodities (56%) and real estate (46%) as best for inflation hedging strategies.
"The sudden return of market volatility is a healthy reminder that it’s important to take a consistent approach to portfolio diversification," said David Giunta, CEO for the US and Canada at Natixis Investment Managers. "Institutional investors are increasingly turning to active managers and alternatives for the tools and flexibility to diversify their portfolios and mitigate risk."

Natixis also found that institutional investors are increasingly integrating environmental, social and governance (ESG) factors into investment analysis to help manage risk and enhance return potential. Whereas a year ago, the top reason institutional investors were integrating ESG was to comply with their firm’s mandate or investment policy,1 their top reason for implementing ESG strategies now is to proactively align investment strategy with organizational values (47%). The survey also found:

  • 59% say there is alpha to be found in ESG investing.
  • 56% believe ESG investing mitigates risks (e.g. loss of assets due to lawsuits, social discord or environmental harm).
  • 61% agree incorporating ESG into investment strategy will become a standard practice within the next five years.
Underscoring the broad range of risks presented in today’s uncertain markets, including interest rates, volatility and geopolitics, the survey found that 63% of institutions say it’s a challenge for their organization to gain a consolidated view of risks across their portfolio. Incorporating ESG strategies and increasing efforts around liability management are two measures that are playing an important role in institutional plans.

Methodology
For the sixth consecutive year, Natixis surveyed 500 institutional investors, including managers of corporate and public pension funds, foundations, endowments, insurance funds and sovereign wealth funds in North America, Latin America, the United Kingdom, Continental Europe, Asia and the Middle East. Data was gathered in September and October 2017 by the research firm CoreData. The findings are published in a new whitepaper, "When. Not if."

 

1 Natixis Investment Managers 2016 Global Survey of Institutional investors. Survey of 500 institutional investors in October and November 2016.

Investing involves risk, including the risk of loss. Investment risk exists with equity, fixed income, and alternative investments. There is no assurance that any investment will meet its performance objectives or that losses will be avoided. This release does not constitute investment advice and should not be construed as a recommendation for investment action. The views and opinions expressed may change based on market and other conditions.

Alternative investments involve unique risks that may be different than those associated with traditional investments, including illiquidity and the potential for amplified losses or gains. Investors should fully understand the risks associated with any investment prior to investing.

Volatility management techniques may result in periods of loss and underperformance, may limit the Fund's ability to participate in rising markets and may increase transaction costs.

Sustainable investing focuses on investments in companies that relate to certain sustainable development themes and demonstrate adherence to environmental, social and governance (ESG) practices, therefore the Fund's universe of investments may be reduced. It may sell a security when it could be disadvantageous to do so or forgo opportunities in certain companies, industries, sectors or countries. This could have a negative impact on performance depending on whether such investments are in or out of favor.

Diversification does not guarantee a profit or protect against a loss.

Alpha: A measure of the difference between a portfolio's actual returns and its expected performance, given its level of systematic market risk. A positive alpha indicates outperformance and negative alpha indicates underperformance relative to the portfolio's level of systematic risk.

Methodology: For the sixth consecutive year, Natixis surveyed 500 institutional investors, including managers of corporate and public pension funds, foundations, endowments, insurance funds and sovereign wealth funds in North America, Latin America, the United Kingdom, Continental Europe, Asia and the Middle East. Data was gathered in September and October 2017 by the research firm CoreData.

Natixis Investment Managers includes all of the investment management and distribution entities affiliated with Natixis Distribution, L.P. and Natixis Investment Managers S.A.

2024144.1.1

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