Institutional investors turn to alternatives

Institutional investors have continued to turn to active management and alternative investments to meet long-term return assumptions and diversify portfolio risks in the face of growing volatility, according to survey findings by Natixis Investment Managers.

The survey found that seven in 10 investors found that the addition of alternative was important for diversifying portfolio risk, with another 57 per cent saying that investing in alternatives was necessary to outperform the broader market.

The trend was additionally exacerbated in the Asia Pacific market where institutions said they were mostly planning to increase their allocation to all alternatives, such as private equity, real estate investment trusts (REITs), and real estate and infrastructure.

Furthermore, 74 per cent of those investors admitted that the potential returns of illiquid investments were worth the risk.

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The survey, which examined about 500 institutional investors around the world, also asked institutional investors to match the best alternative strategies with specific portfolio objectives, who indicated that the best were:

• Diversification
• Fixed-income replacement
• Volatility management
• Alpha generation; and
• Inflation hedge.

Natixis’ Australian chief executive, Damon Hambly, said: “As allocations decline for the third consecutive year, investors are questioning the benefits of passive strategies, with nearly 60 per cent saying passing investing artificially suppresses volatility and distort relative stock prices, 57 per cent fearing it creates risk/return trade-offs, and 63 per cent believing it increases systemic risks (63 per cent).”

The surveyed investors also said that, according to them, the current market environment was likely to be favourable to active management in 2018.

However, in 2015 the survey found that institutions expected that 43 per cent of total assets would be invested in passive strategies in 2018, but in reality the figure was far lower.

As far as investing in environmental, social and governance (ESG) issues was concerned, five in six institutions said that new approach was needed, with a strong focus on integrating ESG into it.

Dave Goodsell, executive director of Natixis’ Center for Investor Insight, said: “Institutional investors have witnessed the impact of environmental, social and governance events at numerous companies in recent years and watched as stock values declined right along with corporate reputations.”

“Attitudes towards ESG investing are changing dramatically, with the vast majority of institutions now saying that ESG leads to alpha generation and will become standard practice in less than five years.”