Finance experts are opting for active management and alternative assets to see them through what is expected to be a volatile 2017, according to a new survey.
It found that volatility topped the list of concerns for next year, with 65 per cent pointing to geopolitical events, 38 per cent citing the consequences of the United States elections and 37 per cent noting the potential for changing interest rate policies.
Natixis Global Asset Management polled decision-makers at 500 institutional investment firms around the world on their market outlook and asset allocation plans for 2017 and beyond.
They were asked about risk, predictions on asset allocation and views on market performance.
The respondents included managers of corporate and public pension funds, foundations, endowments, insurance funds and sovereign wealth funds in North America, Latin America, Britain, Europe, Asia and the Middle East.
"Unprecedented economic and political forces around the world are the top concern for institutions in 2017. In volatile markets, institutions are looking to active management to strengthen returns and manage risk," said Mr John Hailer, Natixis'chief executive for the Americas and Asia and head of global distribution.
Active investing involves trying to outperform an index through strategies such as stock-picking or market timing, as opposed to passive investing which refers to sticking to an index and often comes with lower management fees than active management.
The anticipation of higher volatility has prompted institutional investors to favour active management over passive. The survey found that 73 per cent say the current market environment is likely favourable to active management while 78 per cent reckon they are willing to pay a higher fee for potential outperformance. And 64 per cent believe active management provides better risk-adjusted returns than passive.
Over the longer term, institutions project they will be less reliant on passive investments than they previously believed.
They say 67 per cent of their assets are actively managed and 33 per cent are in index-tracking investments. They expect the share of passive investments to rise only one percentage point, to 34 per cent, in the next three years.
While respondents see an opportunity to pursue returns above the benchmark with actively managed strategies, they are also diversifying portfolios with increased alternative allocations.
Half the respondents plan to increase their use of alternative strategies next year, with 67 per cent using them for diversification and 31 per cent for risk mitigation.
Emerging market equities, high-yield fixed income and financials are other big trends. Here are the key survey highlights:
MORE ALTERNATIVE INVESTMENTS
Institutional investors will shift more towards alternatives next year, raising their allocations to 22 per cent from 18 per cent of assets this year.
They will increase equity allocations slightly, to 35.5 per cent from about 34 per cent, and dial back on fixed income, to 31.5 per cent from 35 per cent.
POTENTIAL WINNERS OF 2017
Among stocks, 39 per cent of investors predict emerging market equities will be the biggest gainers next year.
Within alternatives, 32 per cent say private equity will do the best.
And among bonds, 53 per cent think high-yield issues will outperform.
On the other hand, 41 per cent of investors say US stocks could trail the pack while 67 per cent point to medium- to long-term government bonds.
Among the alternatives, 29 per cent name real estate.
Institutions predict financials will be the best-performing stock sector next year while utilities could deliver the biggest disappointment.
In private equity, the best sectors will be media and telecom, infrastructure and healthcare.