Institutional investors reckon world political and economic events could push the level of market volatility higher in 2017, prompting many to reset their portfolios and rely more on active management and alternative assets.
That's the key finding of a study by Natixis Global Asset Management (GAM), the investment arm of the French bank, which recently polled 500 fund houses.
Volatility topped the list of concerns for next year, with 65% pointing to geopolitical events, 38% citing the US elections, and 37% noting the potential for changing interest rate policies.
“Unprecedented economic and political forces around the world are the top concern for institutions in 2017,” said John Hailer, chief executivie of Natixis GAM for the Americas and Asia and head of global Distribution.
“In volatile markets, institutions are looking to active management to strengthen returns and manage risk.”
Especially in anticipation of higher volatility, institutional investors favour active management over passive.
73% said the current market environment is likely favorable to active management. 78% are willing to pay a higher fee for potential outperformance.
Nearly half (49%) reckon passive investing distorts relative stock prices and risk-return trade-offs and 64% said active management provides better risk-adjusted returns than passive.
Over the longer-term, institutions project they will use passive investments less than they previously believed.
Meanwhile, three-quarters (75%) of the professionals polled sare unaware of the risks of passive strategies and have a false sense of security about their use.
Half (50%) of surveyed institutional decision-makers across the globe plan to increase their use of alternative strategies in 2017, with two-thirds (67%) using them for diversification and a third (31%) for risk mitigation.
Emerging market equities, high yield fixed income and financials are other big winners.
US Presidential impact
The Natixis study showed that institutional investors’ confidence suffered after the US election.
Prior to Donald Trump's victory, two-thirds of respondents expressed confidence in their organisation’s ability to handle the risks associated with investment performance, which fell to only 53% among those surveyed after the election.
The outlook for US and emerging market stocks also changed substantially after the election.
Forty-three percent (43%) of investors surveyed before the election said emerging markets would be the best-performing equity market in 2017 compared to 31% of those surveyed after the election.