[This article appears in our February 2019 issue of ETF Report.]
Institutional investors expect equity and bond markets to remain volatile in 2019, and the stock bull market to end and interest rates to continue rising; however, they’re making a few changes to their asset allocations.
According to the Natixis Global Survey of Institutional Investors, these big investors are also largely sticking with active management, despite previous surveys in which they mentioned interest in moving toward more passive investing. Current allocations are split 70% active/30% passive, with this allocation likely to remain relatively stable through 2021.
For 2019 versus their current allocations, institutional investors have 36.2% of their assets in equities, down from 37.7%; their fixed-income allocation rose to 38.2% from 37.3%; they have 18.3% in alternatives, up from 17.6%; their cash position is at 5.7% versus 5.3%, and they have 1.6% in other investments, down from 2.1%. Even with expected challenging market times ahead, institutions have an average return assumption of 6.7%, down 50 basis points from last year’s survey.
The survey was conducted between October and November 2018, and included 500 institutional investors in 28 countries.
At first glance, it may come as a surprise that institutions have only tweaked their exposure, but Dave Goodsell, executive director of Natixis’ Center for Investor Insight, says that’s not necessarily true.
“They’ve actually been projecting this for the past couple of years,” he said, “and it’s as though the markets had finally caught up with their projections.”
Goodsell says institutional investors have looked at these themes for a few years: “It’s almost as though they’ve been waiting for the other shoe to drop, and it didn’t drop dramatically. It’s been kind of gradual. They’ve seen this coming and they’d been preparing for it, and that’s why we don’t see these big shifts in place.”
Institutional investors flag interest rate risk and stock market volatility as the top two key portfolio risks for 2019. How institutions adapt to the shift from ultra-low yields to rising rates will be a critical success factor in meeting both liquidity requirements and long-term liabilities, the survey shows.
When it comes to equity preferences, there’s an even split between those holding the same U.S. stock positions going into 2019 (42%) and those who will reduce allocations (41%). This may reflect that two-thirds of institutions think the U.S. bull market will end in 2019, Goodsell says.
While 51% will maintain their current allocation to Asia-Pacific stocks, 47% are keeping their European exposure unchanged, and 45% are maintaining their emerging market holdings.
Tilting Further To Active
Because of the expected higher volatility, many institutional investors believe they’ll do better with active strategies than passive, a change from 2015, when institutional investors had an average split of 64% active/36% passive, and anticipated increasing passive holdings to as much as 43% within three years.
Goodsell says he believes he knows why institutional investors have dialed back on passive strategies: “The projections not only call for higher volatility, not only call for interest rate hikes, they’re also seeing higher levels of dispersion. Eight out of 10 of them look at this marketplace and say this is a market that favors active management.”
Although institutional investors say equity market volatility and rising rates will lead to uncertainty, there aren’t immediate major concerns for these big investors. However, within the next five years, 64% of respondents predict another global financial crisis will occur, the survey shows. The biggest causes of the crisis could be public debt, with 60% citing this as a threat. Other threats include asset bubbles popping, geopolitics, trade disputes and an aging population.
Goodsell says institutional attitudes are to keep an eye on events, but stay the course: “They’re looking ahead at it. They think they’re positioned right. It’s kind of like, ‘Keep calm; I think we’ve got it.’”