Time for active management as risks return, say institutional investors

A study delves into investing institutions’ market predictions and moves for year 2018

Time for active management as risks return, say institutional investors
For a long time, easy monetary policies and the lack of market volatility have proven conducive for passive investment strategies. But institutional investors around the world are saying that the markets are due for a jolt, which will provide an opening for active investment strategies to fall back into favour.

Natixis Investment Managers has released the results of a new global survey, which polled 500 institutional investors that manage over US$19 trillion in assets on their outlooks and portfolio moves for 2018. Among the respondents, 77% were worried about asset bubbles arising from the prolonged persistence of low interest rates. Fifty-nine per cent argued that volatility has been suppressed by passive investment strategies, which 63% believe are creating systemic market risks.

“Investors are facing unprecedented challenges as central banks unwind the easy money policies that have dominated the markets since the financial crisis and prepare for the first challenging bond market in more than a generation,” said David Giunta, CEO for the US and Canada at Natixis.

Increased volatility was one of the key expectations among institutional investors, with 78% and 70% predicting more volatility in the stock market and bond market, respectively. The top three portfolio risk concerns identified by respondents were interest rates (62%), asset-price volatility spikes (53%), and liquidity (32%).

There were also some predictions of bubbles forming from excessive risk-taking — something that 71% said both institutional and individual investors have been guilty of. Thirty per cent of respondents said that there’s a stock-market bubble, while 42% called one for the bond market. The outlook for a Bitcoin bubble was much stronger, with 64% expecting an ugly correction for the strongest emerging cryptocurrency.

Given the outlook for market risks, 76% of institutions agreed that active investment management is likely to be beneficial. In searching for growth, respondents said they found active management better suited for accessing emerging market opportunities (75%), providing exposure to non-correlated assets (74%), and implementing ESG strategies (68%). Seventy-three per cent also said active management is better than passive strategies in providing downside protection.

Forty-six per cent of respondents predicted that the spread between security prices will increase in 2018, and 69% said active management will let them take advantage of short-term market movements. With regard to specific sectors, 45% expected the technology sector to outperform the market above any other sector in 2018. Healthcare was the second favourite at 44%, followed by defence (43%) and financials (41%).

Only 43% of institutional investors believed that traditional diversification across stocks and bonds would protect portfolios adequately against downside risks; 64% said fixed income is no longer effective in providing risk management. Respondents also reported plans to increase allocations to non-traditional assets such as private equity (39%), private debt (36%), real estate (33%), and infrastructure (33%).

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