According to international institutional investors, it is increasingly difficult to find diversification among traditional asset classes, with 54% of them in fact stating that stocks and bonds are too correlated to each other to offer distinctive sources of return, as emerges from the new research of Natixis Global Asset Management. The study also shows that alternative instruments are assuming growing importance within institutional portfolios to help generate better risk-adjusted returns – the top priority for institutional investors in 2016.
The research by Natixis Global Asset Management involved 660 institutional investors including public and private pension funds, sovereign wealth funds, insurance companies and foundations that manage assets totaling over 35.000 billion dollars. There are 46 institutional respondents in Italy, of which more than half (52%) have assets exceeding 5 billion dollars.
“In the current environment, traditional asset allocation has become a zero-sum game,” said John Hailer, CEO of the Americas and Asia and Head of Global Distribution at Natixis Global Asset Management. “An investment approach suited to the new market environment is therefore needed. Institutional investors are increasingly turning to a broader mix of uncorrelated instruments alongside traditional stocks and bonds. Analyzing the data on Italy, 50% of institutional investors have already positioned or are about to position their portfolios in view of a rise in interest rates through the use of alternative and uncorrelated instruments. Almost half (46%) believe it is essential to invest in alternatives in order to outperform the markets.
“Government bond yields at low levels, highly volatile equity markets, sharp declines generated by geopolitical tensions, have long confirmed the need for institutional investors to consider new portfolio construction techniques” added Antonio Bottillo, Country Head and Executive Managing Director for Italy of Natixis Global Asset Management. Indeed, the research underlines how institutional investors are concerned about their ability to finance liabilities in a market characterized by low interest rates and volatility.
In response, they are therefore adapting their investment strategies, risk management approach and operations to better meet their short- and long-term commitments. The majority of Italian institutions (92%) declare that the current low-yield scenario is their main concern in risk management, followed by the generation of returns (for 89%) and the financing of long-term liabilities ( 63%). More than half (65%) say meeting short-term growth and liquidity goals is a challenge for their company.
Expected performance between active and passive management
Even though costs are always important for institutionals and many of them will increase the use of passive strategies in more efficient asset classes, active managements are still favored to generate better results. Currently, approximately 74% of the assets of Italian institutions is actively managed and 24% of assets through passive instruments. Over the next 12 months, 68% of Italian respondents say that economic factors, monetary policies and market volatility will favor active managers. A majority of them (80%) agree that active management is a source of alpha, offers access to uncorrelated asset classes (70%) and can take advantage of short-term market movements (57%).
Growing need for innovation in liability management
The vast majority of institutions are concerned about how to achieve their long-term goals and are looking for more innovative solutions in the management of assets and liabilities. More than half of Italian institutions (63%) say they are concerned about their ability to finance long-term liabilities and 61% identify liability management as a challenge in a context of growing longevity. Although around three-quarters of Italians interviewed (76%) say they have tools for managing liabilities at their disposal, 80% are looking for more innovative solutions for managing assets and liabilities in the light of new market scenarios.
“With populations aging and individuals living longer, underestimating future liabilities is a significant risk for institutional investors,” Hailer said. “Institutionalists are showing a growing demand for improved products to better manage long-term liabilities. Our research findings continue to suggest that innovation in liability management is still lagging behind the demands of institutional investors."
The use of socially responsible investments (ESG)
Seven out of 10 (72%) Italian institutions state that it has become increasingly difficult to obtain alpha. Over half (54%) now see environmental, social and governance (ESG) investing as a potential source of returns. The majority of Italian investors surveyed (96%) are already using ESG strategies. This is firstly because it is within their mandate (for 36%) and secondly to minimize the risks (30%). “Year after year, our research continues to highlight a growing trend: institutional investors show an increasing interest in non-traditional investments. Alternative strategies, uncorrelated instruments and socially responsible investments can help institutions better diversify their portfolios and add sources of alpha” Antonio Bottillo concluded.
