International institutional investors say they will find it difficult to meet their long-term needs. Research by Natixis Global Asset Management found that institutional institutions frequently face short-term performance pressures and, as a result, are treading cautiously as they reduce risk in their portfolios for the coming year.
Between October and November of this year, the Natixis Durable Portfolio Construction Research Center interviewed 642 institutional investors, including public and private pension funds, sovereign wealth funds and insurance companies from 27 different countries. Research participants collectively manage $31.000 trillion. Among these, 43 were interviewed in Italy for a total of assets under management of 2 trillion dollars.
1. In the balance between immediate and future needs
80% of investors globally say that in the current scenario it is difficult to generate stable returns and 68% expect to have difficulties managing future outflows due to the growing longevity of the population. Similarly, in Italy 66% expect this difficulty.
One solution that Italian institutions are focusing on is the growing use of uncorrelated asset classes. 75% of investors interviewed in Italy, slightly above the 71% recorded globally, declare that alternative investments are a necessary tool for managing outflows and longevity risk.
“Institutional investors find themselves in a delicate position as the portfolios they manage today will eventually be a major source of income for an aging global population,” said John Hailer, president and chief executive officer of Natixis Global Asset Management-Americas and Asia. “Institutionalists also see it difficult to obtain sufficient returns in the current market scenario. For this reason, I am looking for assets that have a better risk profile and make the portfolio more durable".
Institutions also underline the role that financial advisors can have for private investors. 91% of Italian institutional investors state that investors should seek the professional support of a qualified financial advisor, while 84% recognize that making investment decisions on an emotional wave can lead to lower returns over a long-term horizon.
2. Worried about geopolitical tensions and rising interest rates
According to respondents, the four potential threats to investment performance in the coming year are geopolitical events (for 17% of investors globally), Europe's economic problems (13%), China's slower growth (12% %) and the increase in interest rates (11%).
Europe and the upward trend in interest rates. More than a fifth (23%) see Europe's economic woes as the biggest risk for 2015, followed by rising interest rates (16%) and growing correlation between financial markets (12%).
Still on the subject of risks, the majority of Italian investors (84%) are worried about whether they will be able to obtain returns, about risks that cannot be hedged (80%) and about the current scenario of low returns (72%).
To manage these risks, Italian institutional investors mainly use risk budgeting strategies (46%) and a greater weighting towards uncorrelated assets (41%). More than half (53%), in fact, believe that return targets should be independent of market performance.
“Institutional investors represent an important source for long-term finances and pension funds in particular must obtain sufficient returns to meet current and future needs, especially when beneficiaries are living longer – says Antonio Bottillo, Chief Executive Officer for Italy of Natixis Global Asset Management –. These data confirm that, even in Italy, institutional investors are increasingly looking for new investment techniques capable of assisting and helping clients achieve long-term goals".
3. Preference for shares, but still very cautious
Looking ahead to 2015, institutional investors are aware of the upward trend in interest rates and favor equities. According to the research, global investors expect to adjust their bond portfolios and their asset allocation as rates rise. Institutional institutions in Italy are those who most intend to position themselves on bonds with shorter duration (60%) or declare to reduce their exposure to fixed income (58%).
43% of investors surveyed globally expect equities to be the best performing asset class in 2015, with US equities ahead of all other geographies. Another 28% see alternative assets as the top performers, with private equity taking the top spot in this category.
In line with global data, Italian institutionals see private equity (19%), global equities (16%) and emerging markets equities (16%) as the best performing asset classes over the next 12 months .
“Even though they perceive stocks as the best investment for next year, institutional investors continue to be cautious,” says Hailer. “Institutionalists said they are more likely to increase their weighting in yield-oriented investments, such as dividend-paying stocks or value investments, rather than riskier asset classes. They want to avoid being overwhelmed by a sudden surge in the markets”.
4. Towards more responsible investments
Over half (55%) of investors globally agree that traditional investments are too correlated to offer any distinctive sources of returns. As markets become more efficient, they therefore seek out new sources of performance. The research shows that many have moved away from traditional asset allocation to a greater use of alternative asset classes.
“The majority (70%) of Italian institutional investors – confirms Bottillo – recognize the importance of going beyond traditional strategies and including alternative or uncorrelated asset classes in their portfolios”.
But a new source of performance can also be represented by social and responsible investments. Many investors argue that so-called ESG investments can be both a source of return and a way to reduce portfolio risk. An ESG approach takes into consideration non-financial factors related to the environment, corporate governance and the social sphere in order to favor the long-term sustainability and ethical impact of an investment.
More than half of Italian institutions (54%) - in line with global data - agree that ESG factors play an important role in the manager selection process. The same percentage of investors also argue that social and responsible investments have benefits on alpha generation and long-term growth. About half of Italians believe that ESG investments can mitigate the risk of losses deriving from lawsuits, social issues and environmental disasters.
“The research data show how Italian institutional investors are looking for better tools that can combine long-term growth and protection from market shocks” concludes Antonio Bottillo. "To try to address these needs, we believe that a risk-oriented approach, combined with the use of flexible, uncorrelated and alternative strategies may be able to navigate through different market scenarios and meet future needs".
