Institutional investors are raising their exposure to higher-risk assets in pursuit of better returns, according to a survey by Natixis Global Asset Management.
More than 500 managers of pensions, foundations, endowments, insurance funds and sovereign wealth funds globally were polled by the firm recently.
Their top organisational concern is low yield and given the prospect for greater volatility and persistence of low interest rates, few institutions are relying on traditional portfolio strategies to meet their performance goals.
Instead they are increasing their exposure to equities and alternatives and turning to illiquid assets and the private markets for risk-managed return generation and yield replacement.
At the same time, they are doubling down on risk management to better balance long-term growth objectives and liquidity needs, but say they need better ways of identifying risk across their portfolios.
“While risk factors change over time, the challenge for institutional investors remains to deliver long-term results while navigating short-term market pressures,” said David Giunta, chief executive of Natixis Global Asset Management for the United States and Canada.
“Given their mandates, avoiding risk is not an option for institutional investors. They have to beat the odds or change the game, and they are doing so by balancing risks and embracing alternatives to traditional 60/40 portfolio construction, but always with an eye on their long-term objectives.”
In examining their goals, 70% of investors believe their return expectations are achievable, but confidence may not be as strong as it seems on the surface.
Half (50%) of the institutions expect to decrease return assumptions in the next 12 months.
75% of those surveyed say alpha is becoming harder to come by as markets become more efficient.
Sixty-seven percent of institutional investors think private equity provides higher risk-adjusted returns than traditional asset classes, and more than half (55%) believe private equity provides better diversification than traditional stocks.
The three areas they consider most promising are infrastructure, healthcare and the technology, media & telecom sector.
Seventy-three percent think private debt provides higher risk-adjusted returns than traditional bond investments. Many also say they are likely to consider increasing use of direct lending (44%), collateralized debt (34%) and special situations (34%).
About one-third (34%) of institutions report that they are planning to increase allocations to real assets, including real estate, infrastructure and aircraft financing, in the next 12 months.
Half of institutions (50%) report they are increasing exposures to alternative investment strategies this year.
The adoption of alternative investments isn’t limited to growth portfolios, as 77% of respondents say alternatives have a role in liability-driven investing as well.
“Institutions are turning to risk assets to combat this extended period of historically low rates, but they also need strong ballast to keep them on course,” said Robert Hussey, executive vice president of the Institutional Services Group.
“Even as they embrace risk, they have a plan for managing their exposure using the wide range of tools that are now available.”