14 December 2016

Hedgeweek: Institutional investors turning to active management in 2017, says Natixis

World political and economic events could push the level of market volatility higher in 2017, with institutional investors turning to active management and alternative assets to manage risk and boost returns as a result, according to a study by Natixis Global Asset Management.

Natixis surveyed decision makers at 500 institutional investment firms around the world on their market outlook and asset allocation plans for 2017 and beyond. Volatility topped the list of concerns for 2017, with 65 per cent pointing to geopolitical events, 38 per cent citing the US elections, and 37 per cent noting the potential for changing interest rate policies.

“Unprecedented economic and political forces around the world are the top concern for institutions in 2017,” says John Hailer, CEO of Natixis Global Asset Management for the Americas and Asia and head of global distribution. “In volatile markets, institutions are looking to active management to strengthen returns and manage risk.”

Especially in anticipation of higher volatility, institutional investors favour active management over passive. They also express concern over the market distortions caused by passive investing with 73 per cent saying the current market environment is likely favourable to active management, while 78 per cent say they are willing to pay a higher fee for potential outperformance.

Over the longer-term, institutions project they will use passive investments less than they previously believed. They say 67 per cent of their assets are actively managed and 33 per cent are in index-tracking investments, and they expect the share of passive investments to rise only one percentage point, to 34 per cent, in the next three years. In a 2015 Natixis survey, investors expected 43 per cent of assets would be passively managed within three years.

The main reason for using passive strategies, cited by 88 per cent of respondents, is a desire to manage fees, but 57 per cent said the prevalence of “closet indexers” – managers who charge higher active fees for index-like strategies that closely hug their benchmark – as another reason. Three-quarters (75 per cent) of these professional investors say that individual investors are unaware of the risks of passive strategies and have a false sense of security about their use.

Half (50 per cent) of surveyed institutional decision-makers across the globe plan to increase their use of alternative strategies in 2017, with two-thirds (67 per cent) using them for diversification and a third (31 per cent) for risk mitigation. Emerging market equities, high yield fixed income and financials are other big winners.

The survey found that institutional investors will shift more toward alternative investments in 2017, raising their allocations to 22 per cent from 18 per cent of assets. They will increase equity allocations slightly, to 36 per cent from 34 per cent, and dial back on fixed income, to 32 per cent from 35 per cent.

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