Today Natixis Global Asset Management (AUM $887 Billion) released the findings of its annual global survey of 500 institutional investors, including public and corporate pensions, insurance funds, foundations, endowments and sovereign wealth funds. Collectively, they oversee $15.5 trillion in assets.

2016 Hedge Fund Letters

According to the survey, market volatility is the biggest risk to managers’ investment performance this year, but avoiding risk is not an option, given their mandates. Instead institutions are embracing risk in pursuit of better returns and much needed yield. Key strategies include growing use of private investments, illiquid assets and increased exposure to alternatives in the year ahead. For example:

  • 56% say their organizations are embracing illiquid assets more than they were three years ago
  • 55% believe private equity provides better diversification than traditional asset classes
  • 73% say private debt provides higher risk adjusted returns than traditional fixed income vehicles
  • 34% report that they are planning to increase allocations to real assets, including real estate, infrastructure and aircraft financing, this year
  • 77% say alternatives have a role in liability-driven investing

The results also reveal:

  • Growth in outsourced management: More diversified portfolios are driving an uptick for specialist capabilities
  • Potential changes in return assumptions: 50% say their organization is expecting to decrease return assumptions in the next 12 months
  • Few relying on traditional strategies: Reliance on risk budgeting, diversification across sectors and increasing use of alternative investments seen as most effective in managing portfolio risk

Executive Summary

Double down – Faced with increased volatility, institutions embrace the risk

Following a year of political volatility that brought Brexit, a Trump presidency, the resignation of the Italian Prime Minster Renzi and the impeachment of both Brazil’s Dilma Rousseff and Korea’s Park Geun-hye, institutional investors see geopolitical upheaval continuing through 2017 and they are betting it will lead to increased market volatility across the globe.

Beyond politics, institutional investors are feeling the added pressure that a decade of accommodative monetary policy places on their ability to manage long-term liabilities. An anticipated policy shift in the U.S. may help to moderate yield concerns in the long run, but it could double the short-term challenge by putting downward pressure on the value of current bond holdings.

Faced with greater volatility and continued rate pressures, the 500 decision makers included in this, our fifth annual Global Survey of Institutional Investors, appear to be doubling down on their bets by increasing allocations to equities, private equities, and other high-risk assets seeking to generate returns. Institutional investors will have their hands full balancing three critical objectives:

  • Managing risk – Navigating higher volatility and low yields is a risk management challenge which is compounded by more stringent solvency requirements, which 71% of respondents say creates too much bias for shorter time horizons and more liquid assets.
  • Generating returns – Institutions are not shying from volatility and will look to active management to help capitalize on opportunity. Nearly three-quarters (73%) say today’s market favors active managers and 86% say it’s the better choice for generating alpha. Alternative investments and private assets also feature prominently in institutional return plans.
  • Managing the portfolio – A large number of respondents see the need for outside help in managing more complex portfolio strategies. Four in ten (41%) report turning to outsourced CIOs or fiduciary managers; most frequently they are looking to outside managers for specialized capabilities.

Volatility and uncertainty may be the cards institutions are dealt in 2017, but they are willing to bet on positive investment outcomes. They are coming to the table with a strategy for managing the risks and have clear asset preferences. How well they play their hand will determine their success in meeting their number one goal: delivering higher risk-adjusted returns.

Introduction – Double Down

Faced with increased volatility, institutions embrace the risk

On January 26, 2016, with the Dow Jones in the throes of the worst New Year’s slump in history, if you had been given one-million-to-one odds that, one year later, the Dow would be at 20,000, the U.K. would be navigating its exit from the European Union, and a former reality television personality would be the president of the United States, would you have taken the bet?

These are the table stakes with which institutional investors, often considered the “smart money,” are playing as they look to manage assets earmarked for pension payouts, insurance settlements, and funding for endowments over the next 40 years. Faced with prospects for increased market volatility and rising interest rates (at least in the U.S.), institutions are doubling down on risk in pursuit of better returns and much-needed yield.

Institutional Investors

Our 2016 Global Survey of Institutional Investors provides a view into the reality of those responsible for managing assets on behalf of public and private pensions, foundations and endowments, insurance companies and sovereign wealth funds, and finds the smart money anticipating increased volatility as a by-product of a world in tumultuous change. Faced with greater risk, institutional decision makers say they will increase allocations to equities, private equities and other higher risk assets in the year ahead – seeking to better position themselves to meet their three most important objectives: delivering the highest risk-adjusted returns (28%), growing capital (18%) and effectively managing return volatility (17%).

The tables have turned, maybe

While nearly a decade of accommodative monetary policies has helped to buoy market returns for institutional investors, it has also stymied their need to address long-term liabilities. Policies implemented nine years ago to stave off a global credit crisis have kept interest rates artificially low, making it increasingly difficult to find yield. Rates have also had an equalizing effect on equity markets, keeping dispersion1 low and equally rewarding the companies with middling results alongside the companies that could demonstrate meaningful earnings growth. Topping off the challenge are regulatory and liquidity requirements that have limited the choices for professional investors as they look to make up the difference.

Now, the effects of historic global geopolitical change may be amplified by divergent global monetary policy, and institutions anticipate the likely outcome will be increased market volatility. Facing this new gambit, institutional decision makers must manage three critical factors that could determine their long-term success:

  • Assessing and managing risk: Volatility may be the biggest risk concern for institutions in the year ahead, and from the aftermath of the U.S. election to a hard Brexit, a softening market in China, and interest rates, they see many potential sources. While they believe it’s within their abilities to handle the risk, many may be second-guessing the strategies they’ll deploy to manage it.
  • Generating returns: Global populism has not only upset political convention, it’s also sparked volatility in markets around the globe. Reignited market performance in the U.S., coupled with interest rate concerns globally, has institutions returning to active management and delving into private markets for return potential, while upping alternative investment 2 allocations for diversification.
  • Portfolio management: Given the challenges of today’s market, the mechanics of managing institutional portfolios goes well beyond traditional asset allocation considerations. In-house investment capabilities may not be enough as institutions report an uptick in outsourced management for at least a portion of assets. Adding to the challenge is the need to manage long-term liabilities and sustainability mandates alongside market risk.

Increased risk and volatility are

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