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2015 GLOBAL SURVEY OF INSTITUTIONAL INVESTORS
INVESTOR INSIGHTS SERIES
2016 IN FOCUS
The investment outlook for
institutional investors
E XECUTIVE SUMMARY
Institutional investors are concerned about generating returns and navigating a lowyield environment as they make plans for 2016. As a result, nearly two-thirds (64%)
of the 660 decision makers interviewed for our 2015 Global Survey of Institutional
Investors1 say alpha is becoming harder to obtain as markets become more efficient.
In response, these investors plan to increase allocations to equities and alternative
investments2 in hopes of generating better risk-adjusted returns.
Looking at the year ahead, public and private pension managers, insurers, sovereign
wealth funds, foundations, endowments and central bankers share a consistent
view on markets, risk and the steps they will need to take in order to meet long-term
return objectives:
• Picks for 2016: Projecting asset class performance for the year ahead,
institutional investors predict an up year for stocks and alternative investments.
On the other hand, they believe monetary policy and interest rates across the
globe will suppress fixed-income returns. Institutions will look to adjust portfolio
allocations accordingly.
• Market challenges: These same decision makers foresee a bumpy road
ahead for their asset class picks. Volatility, macroeconomic conditions and
geopolitical events all present challenges. Institutions see it as the type of
market that will favor active investment management.
• Portfolio strategy: Meeting return objectives in this environment will
mean challenging conventional thoughts on how to source investment
management expertise and will require a hard look at fixed-income
strategy. For many, this will need to be executed within the framework
of new regulatory standards for risk and liquidity, which could inhibit their ability to respond.
Successful implementation of portfolio strategy in 2016 will require walking a
tightrope between risk, return and yield. If they are to meet their primary
objective of achieving their return targets while staying within their risk
budgets, institutions will likely seek added help from outside specialists in
their execution of investment plans.
1 Natixis Global Asset Management, Global Survey of Institutional Investors conducted by CoreData Research, October 2015. Survey included 660 institutional investors in 29 countries.
2 An alternative is an investment that is not one of the three traditional asset types (stocks, bonds and cash). Alternative investments include hedge funds, managed futures, real estate,
commodities and derivatives contracts. Alternative investments involve specific risks that may be greater than those associated with traditional investments, and there is no assurance
that any investment will meet its performance objectives or that losses will be avoided.
SECTION ONE
Clear expectations on asset class performance
If their projections for top-performing asset classes in 2016 are correct, institutional
investors will be well positioned to address their number one investment concern in
today’s market: generating returns.
High hopes for equities
Across the board, institutional investors believe equities are poised to outperform in
the next 12 months. More than four in ten respondents (42%) believe global equities
are most likely to be among the top performers, followed by U.S. equities (33%),
emerging equities (25%) and domestic equities in their home countries (15%).
Beyond the traditional equity classes, 20% of respondents say private equity
investments will be among the best in class for 2016.
“The institutional outlook for equities may not just be optimism for stocks so much as a
commentary on the state of the bond markets,” says Natixis Global Asset Management
chief market strategist David Lafferty. “Interest rates are low globally and negative
in a third of European bond markets. These investors would rather tie themselves to
corporate growth in stock than to sovereign stagnation in bonds.”
OUTLOOK ON THE BEST- AND WORST-PERFORMING ASSET CLASSES FOR 2016
Institutions see equities as best performers for 2016
Best performers
Worst performers
Global equities – 42%
Commodities – 36%
U.S. equities – 33%
Emerging market fixed-income – 32%
Emerging market equities – 25%
Global fixed-income – 25%
Private equity – 20%
Domestic fixed-income – 21%
Hedge funds – 16%
Natural resources – 21%
Commodities, fixed-income to falter
If an optimistic market outlook represents the upside for stocks, then restrictive
monetary policy across the globe may be the root cause for overwhelming pessimism
on the fixed-income side of the equation. With the U.S. dollar continuing to strengthen
against other global currencies, institutional decision makers project that commodities,
such as precious metals, are likely to underperform other investments, with 36%
placing the class within their three worst performers and another 21% citing natural
resources, including energy and timber.
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2015 GLOBAL SURVEY OF INSTITUTIONAL INVESTORS
Whether it is low to negative interest rates in Europe or the prospect of an uptick in
rates in the U.S., central bank policies across the globe are also a likely reason for
institutions to tick the box for a range of fixed-income classes to sit on the list of worst
performers. Emerging market bonds (32%), global bonds (25%) and domestic bonds
(21%) round out the list of worst performers.
Allocation preferences follow picks
Institutional allocation plans follow their views on asset class performance. Private
equity appears to get the most attention as 50% of respondents say they will increase
allocations to this alternative, while 37% will maintain their current allocations. Equities
also get considerable attention within institutional allocation plans for the year ahead,
with 48% saying they will increase and another 37% saying they will maintain
allocations here.
The demand for non-correlated returns comes across loud and clear in the next two
asset class choices: 46% say they will increase investments in private debt, while 41%
will increase hedge fund allocations. Focus on private debt is no surprise given that
current interest rates have 42% of institutions saying they will decrease allocations to
traditional bond strategies.
ALLOCATION CHANGES FOR 2016
Asset class
Decrease
Increase
Maintain
Equities
14%
48%
37%
Fixed-income
42%
16%
42%
Private equity
12%
50%
37%
Private debt
7%
46%
47%
Hedge funds
14%
41%
45%
While their perceptions and strategies are clear, institutional investors know that
the markets may present significant roadblocks to fulfilling their expectations on
investment performance.
2015 GLOBAL SURVEY OF INSTITUTIONAL INVESTORS
5
SEC TION T WO
Will markets cooperate with institutional expectations?
If institutions are to deliver on their primary investment objective of achieving the
highest possible risk-adjusted return, they will need to address their second objective:
effectively managing volatility in returns. Given that they are looking for equities to be
the top performers, they are entering 2016 with eyes wide open to the possible risks.
More than four in ten of our respondents (42%) say they believe market volatility will
be the number one risk to investment performance in 2016. After a year in which we
saw 56 days with 1% movement in the S&P 500 between January 1 and October 31,
it should be no surprise that this weighs on the minds of investors. But volatility is not
the only fact that could derail plans, as slow economic growth (40%), monetary policy
(39%) and geopolitical risk (37%) round out institutions’ top risk concerns.
Sources of volatility reminders of recent events
Following a year in which the horrors of terrorism have led news coverage, investors
see geopolitical events as the top cause of volatility (54%). With the terror attacks
in Cairo, Beirut, Paris and Mali; the Syrian refugee crisis; the start of a polarized U.S.
presidential election cycle – there are many potential political triggers that could send
markets on another rollercoaster ride.
TOP CAUSES OF VOLATILITY
Geopolitical concerns
54%
China market woes
49%
International monetary policy divergence
47%
Interest rate change
46%
China market woes (49%) also factor into potential causes of volatility in the minds
of the decision makers we spoke with. As evidenced by the volatile reaction to its
disparate efforts at financial stimulus, China has considerable sway over markets
around the globe. When it falters, the world takes note. But China is not alone.
The long-term effects of economic stimulus in other countries could also spur volatility.
Institutional investors also believe international monetary policy (47%) and interest
rate changes (46%) are key challenges as they consider potential sources of volatility.
After nearly a decade without an increase in interest rates, the mere anticipation of a
quarter-point increase can put markets in turmoil. Imagine the potential fervor that will
be seen when rates actually do go up.
It will be up to investment teams to find a way to manage these risks at the portfolio
level. According to our study, two-thirds of respondents say these conditions favor
active management.
6
2015 GLOBAL SURVEY OF INSTITUTIONAL INVESTORS
SECTION THREE
Actively managing the portfolio
The search for better diversification and attractive returns could take institutional
investors off the beaten path in the year ahead. Where they have traditionally relied
on internal expertise to manage investments, institutions turn to external managers to
augment their own capabilities. This is particularly true when investments are illiquid,
difficult to access or difficult to accurately assess.
Respondents report the use of external managers across a range of asset classes.
Most frequently, they cite real estate (53%). Given the size and scale of these hard
assets, an external manager may be better positioned to source and evaluate potential
investments – and better prepared to manage a portfolio of properties.
Outsourcing for greater efficiency
We also see institutional investors reporting that they turn to external managers for
expertise in emerging market equities. With opportunities located in far-flung locations
across the developing world, it may be more efficient to tap external resources for their
expertise in identifying and evaluating investments. In essence, this allows institutions
to participate in key growth opportunities without having to add staff or increase
expenses, making them more efficient in the pursuit of returns.
TOP ASSET CLASSES WHERE INSTITUTIONS OUTSOURCE MANAGEMENT
Real estate
53%
Emerging market equities
49%
Private equity
45%
Private debt
44%
Emerging market fixed-income
41%
We find institutions relying on external managers for private equities (45%) and private
debt (44%). Here, too are examples of tapping into outside expertise and participating
in parts of the capital markets with greater efficiency. Specialists in these alternative
asset classes may be able to provide considerable value.
Alternatives a case of function over form
Knowing that institutions expect to increase allocations to a range of alternative
investments, it is interesting to note how they plan to apply these strategies within
their portfolios. Private equity, private debt and hedge funds are all mentioned as
places where a number of institutions plan to increase allocations in the year
ahead. Equities are also favored for an increase, but their purpose in the portfolio
is clear – return generation.
2015 GLOBAL SURVEY OF INSTITUTIONAL INVESTORS
7
SEC TION THREE
We see a clear opinion favoring the use of alternatives: 54% of those we surveyed say
traditional assets are too highly correlated to provide distinct sources of return, while
56% say they believe their alternative holdings will perform better in 2016 than in 2015.
Institutions say they look to alternatives to fit a range of portfolio functions. Enhanced
diversification (64%), enhanced alpha (50%) and risk mitigation (49%) rank as their top
three portfolio applications. It appears that their preferences are selected with these
goals in mind.
Anticipating rate changes
After nine years without a rate increase and two years of public speculation about a
quarter-point increase, any movement by the U.S. Federal Reserve will be the most
widely telegraphed financial decision many investors ever see. In advance of any rate
decision, institutions report they will implement a wide range of strategies to help
decrease interest rate sensitivity within their portfolios.
Most commonly, our respondents say they will shorten bond durations (65%) in an
effort to decrease exposure to interest rate movements. Second, they plan to reduce
exposure to fixed-income altogether (49%), and their third most commonly used
strategy is the implementation of alternative investments (47%).
WHY INSTITUTIONS IMPLEMENT ALTERNATIVE INVESTMENTS
Diversification
64%
Alpha generation
50%
Risk mitigation
49%
Access to new investment opportunities
37%
High risk-adjusted returns
32%
In this time of uncertainty, it is likely that institutional interest in real estate may be
an indication of their need to generate stable income over the long term, as 34% of
respondents say they are planning on increasing their allocations to commodities such
as real estate.
Regulatory challenges ahead
Regulatory pressure should be felt to a greater degree by institutional investors in 2016.
With Solvency II taking effect on January 1, 2016, European institutions will need to
examine investment selections within new liquidity frameworks. U.S. institutions are
likely to feel similar pressures as more measures under the Dodd-Frank law are
implemented. As a result, 80% of those we spoke to say it will be challenging to
comply with these new regulations.
In the end these factors will all weigh heavily on the minds of institutional decision
makers as they look to balance the need to meet short-term performance goals while
fulfilling long-term liabilities.
8
2015 GLOBAL SURVEY OF INSTITUTIONAL INVESTORS
CONCLUSION
More insight needed
Institutional investors are facing the uncertainty of a new year with optimism: They
see opportunities to generate returns from growing equity markets around the world;
they express confidence in their ability to manage interest rate sensitivity within their
portfolios; and they see opportunities to enhance overall diversification with the use of
alternative investments.
Their investment outlook is only half of the picture. There are many external regulatory
and internal policy issues converging to shape investment decisions in the year ahead.
Our full survey report will provide a more complete picture of the institutional mindset for
2016. It will look beyond immediate market considerations and examine the use of active
and passive investment strategies, the role of ESG strategies (environmental, social and
governance), and the need for greater innovation in the management of liabilities.
Each of these factors plays a significant role in determining how institutions will invest, not
just in 2016 but also for decades to come. We see it as our role to help bring these issues
to the surface and initiate a healthy debate of the right course forward.
2015 GLOBAL SURVEY OF INSTITUTIONAL INVESTORS
9
CONCLUSION
PROGRAM OVERVIEW
About the Durable Portfolio Construction Research Center
Investing can be complicated: Event risk is greater and more frequent. Volatility is
persistent despite market gains. And investment products are more complex. These
factors and others weigh on the psyche of investors and shape their attitudes and
perceptions, which ultimately influence their investment decisions. Through the
Durable Portfolio Construction Research Center, Natixis Global Asset Management
conducts research with investors around the globe to gain an understanding of their
feelings about risk, their attitudes toward the markets, and their perceptions of investing.
Research agenda
Our annual research program offers insights into the perceptions and motivations of
individuals, institutions and financial advisors around the globe and looks at financial,
economic and public policy factors that shape retirement globally with:
• Global Survey of Individual Investors
Reaches out to 7,000 investors in 17 countries.
• Global Survey of Financial Advisors
Reaches out to 2,400 advisors, consultants and decision-makers in 14 countries.
• Global Survey of Institutional Investors
Reaches out to more than 600 investors, consultants and decision-makers in
29 countries.
• Natixis Global Retirement Index
Provides insight into the environment for retirees in 150 countries based on
20 economic, regulatory and health factors.
The end result is a comprehensive look into the minds of investors – and the
challenges they face as they pursue long-term investment goals.
Helping to build more durable portfolios
Natixis Global Asset Management is committed to helping advisors build better
portfolios that stand up to the challenges of modern markets. To learn more about
our Durable Portfolio Construction® philosophy, visit durableportfolios.com.
2015 GLOBAL SURVEY OF FINANCIAL ADVISORS
2014 INVESTOR INSIGHT SERIES
2015 GLOBAL SURVEY OF INDIVIDUAL INVESTORS
This communication is for information only. Analyses of the survey referenced herein are as of September 2014. There can
be no assurance that developments will transpire as may be forecasted in this material. This material may not be distributed, published, or reproduced, in whole or in part. Although Natixis Global Asset Management believes the information
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2015
GLOBAL
RETIREMENT INDEX
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Changing roles for financial advisors
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1068548.1.1
WP110-1214
UNDER PRESSURE
Facing up to the challenge of
balancing short-term performance
needs with long-term liabilities
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