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Pension funds and other institutional investors believe they will meet their long-term
objectives, but they expect it will be difficult to earn stable short-term returns and
manage liabilities tied to the extended lifespans of their beneficiaries, according to survey
findings released today by Natixis Global Asset Management. Citing pressure to focus on
short-term performance and their obligation to balance asset growth and protection,
investors are cautiously pursuing innovative ways of generating income and alpha.
The Natixis global survey of 642 institutional investors, including public and corporate
pension funds, sovereign wealth funds and insurers collectively managing $31 trillion in
assets, explores current market outlook and strategies in portfolio construction, risk
management and operations.
While institutional investors are optimistic about equities in 2015, their outlook is
tempered by market risks beyond their control and unknown liability risks ahead,
particularly those linked to increased longevity. Despite their need for asset growth,
institutional investors are twice as likely to reduce portfolio risk as to increase it in the
next 12 months. And even with the use of liability-driven investing strategies, the biggest
challenge is their ability to generate sufficient returns.
Key findings of the survey include:
- While 87 percent expect to meet their long-term liabilities, more than half of the
respondents believe most other organizations will fail to do so (consistent with results
from last year’s survey). - 80 percent of institutions say it is challenging to generate stable returns in the short
term, while 60 percent of investors expect it will be difficult to fund their long-term
liabilities. - 60 percent of investors responded that the industry has not been innovative enough in
developing liability-driven investment (LDI) solutions to meet current and future costs. - On average, institutions expect they can achieve yearly returns of 6.9 percent after
inflation. - 81 percent of institutional investors believe it will be difficult to mitigate the impact of
volatility, and more than three-quarters (77%) are concerned about their ability to
manage tail risk. - The top four potential threats to investment performance in the next year are
geopolitical events, European economic problems, slower growth in China and rising
interest rates.
“Institutional investors, particularly pension funds, have a lot at stake as the portfolios
they manage today are an important source of tomorrow’s income for the world’s aging
population,” said John Hailer, president and chief executive officer for Natixis Global Asset
Management in the Americas and Asia. “Our Durable Portfolio Construction platform
emphasizes risk as the primary factor to determine asset allocation, which may give
investors the broader perspective needed to withstand market changes and surprises and
generate the returns they are seeking.”
Generating return in efficient markets
More than half (55%) of institutional investors agree that traditional assets are too highly
correlated to provide distinctive sources of return. As the markets become more efficient,
they are looking for new sources of performance. The survey found that most have turned
away, in some measure, from traditional asset allocation and toward a greater use of
alternative strategies:
- 75 percent of investors feel that alpha is becoming harder to obtain as the markets
become more efficient. - 81 percent agree that alternatives are suitable for institutional portfolios, and 60
percent say they are a good source of returns. - 71 percent believe that alternatives are necessary for institutional investors to manage
liabilities and longevity risk.
Where’s the alpha? ESG investing
Many investors say they believe so-called ESG investing can be both a source of return
and a way to reduce risk. An ESG approach to investing takes nonfinancial factors –
environmental, social and corporate governance – into account to help determine the
long-term sustainability and ethical impact of an investment. The survey showed:
- 54 percent think that ESG investing has long-term growth and alpha benefits.
- 55 percent agree that ESG investing mitigates risks such as loss of assets due to
lawsuits, social discord and environmental disasters.
Market picks for 2015
As they look ahead to 2015, institutional investors are wary of higher interest rates and in
favor of equities. “Even as they perceive stocks as next year’s best investment category,
institutional investors are cautious,” Hailer said.
Among the survey findings:
- 67 percent of institutional investors expect difficulties over the next three years linked
to rising interest rates, and 81 percent say it will be challenging to manage volatility in
that time. - As rates rise, the top three ways institutional investors plan to position their portfolios
are to move from long to shorter-duration bonds (61%); reduce exposure to fixed-income
(46%); and increase use of alternative strategies (36%). - 46 percent of institutional investors predict stocks will be the strongest asset category
in 2015, with U.S. equities standing above those from other regions. - Another 28 percent identify alternative assets as top performers, with private equity
leading the way in that category. - Only 13 percent predict bonds will be best, followed by real estate (7%), energy (3%)
and cash (2%).
« In terms of asset allocation, real estate and value investments are favored by global institutional investors for next year: 40% plan to increase these strategies in their portfolio. Income generating investments is also in a good position, mentioned by 36% of respondents », states Christophe Point, Managing Director, Head of France, Geneva and Monaco at NGAM Distribution.
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