Natixis survey reveals how allocations are moving to more active management and alternative investments
Institutional investors saw the recent spike in volatility coming a mile off – and had already positioned allocations to active management and alternative investments.
This level of preparation was revealed by a survey conducted by Natixis Investment Managers, which reported that 78% of institutions anticipated the increased volatility that shook the markets two weeks ago.
Of the 500 institutional investors polled from around the world, seven out of 10 said that the addition of alternatives is vital for diversifying portfolio risks, while 76% thought the current environment favours active managers.
Dave Goodsell, executive director of Natixis Investment Managers’ Center for Investor Insight, said the fact the money managers had such foresight was not a surprise but that the length of time they’ve been preparing was the real eye-opener.
He said: “You get a sense that they are looking at the markets and the factors that are in place: potential for changes in monetary policy; interest rate increases; and geo-political uncertainty. So to them it’s probably a question of when things are going to change not if.
“But if you dig a little deeper, they’ve been preparing for this for quite a while. They’ve been making portfolio moves over the past three years that have been setting themselves up for any potential volatility that we see coming ahead.”
The survey also revealed a drive towards using alternative strategies with specific portfolio objectives in mind. In terms of diversification, institutional investors cited global macro strategies (47%), commodities (41%) and infrastructure (40%) as the preferred areas, while infrastructure (55%) and private debt (47%) were highlighted as the best way to replace fixed income as interest rates rise and the 30-year bond bull market ends.
Goodsell believes institutions are being forced to diversify into alternative markets in order to secure the returns they need.
He said: “One thing that is driving it is low yield; they have to find a way to replace income sources if they are not getting it from where they normally do. That’s why they are favouring things like infrastructure - they really want to find a diverse way of generating the income they need.
“The other part of it is that things have been moving kind of in sync all along. If you talk to the macro guys, they’ll say that low interest rates and the fact they have been so low for so long has really lifted everything equal. There has been very little dispersion in the differentiation of prices. They are looking for ways to diversify from that, so things like global macro, commodities or again infrastructure help them do that. It’s really a question of how do they use a different source to really get the portfolio needs they have.”
Another key area that the survey highlighted was how alternative strategies are being used to outperform traditional markets in alpha generation. Of those polled, 72% said private equity was their top choice for generating alpha, while 45% picked hedged equity.
Goodsell said: “It shows the multi-purpose role that alternatives are playing. Rewind the clock a few years and the discussion was all around diversification; that’s why people wanted to have alternatives. Now it’s this multi-dimensional use.
“They are looking at it for income replacement, for diversification and they are also looking at it for alpha generating and how they are going to get an edge in the market. That’s why we see a lot of them in private equity.”
The Natixis survey also revealed the extra importance now being placed on ESG investing, with 59% believing there is alpha to be found in this space, with 61% of the opinion that incorporating ESG into investment strategy will become standard practice within five years.