Saturday, Mar 25, 2017

Dubai:

Ahead of expected volatility in markets, the focus is back on active fund management, institutional investors feel, as they seek to boost returns.

This is according to a survey done by Natixis Global Asset Management after interviewing 500 institutional investment firms, which gave insights on their allocation strategy in 2017.

Especially in anticipation of higher volatility, institutional investors favour active management over passive, according to the survey. They also expressed concern over the market distortions caused by passive investing.

“Unprecedented economic and political forces around the world are the top concern for institutions in 2017,” said John Hailer, chief executive officer of Natixis Global Asset Management 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.”

About 73 per cent said the current market environment is likely favourable to active management, and nearly 80 per cent were willing to pay a higher fee for their outperformance. More than 50 per cent said active management provided better risk-adjusted returns than passive investments.

They say 67 per cent of their assets are actively managed and 33 per cent are in index-tracking investments, and they expect the share of passive investments to rise only one percentage point, to 34 per cent, in the next three years. In a 2015 Natixis survey, investors expected 43 per cent of assets would be passively managed within three years.

Institutional investors will shift more towards alternative investments in 2017, raising their allocations to 22 per cent from 18 per cent of assets. They will increase equity allocations slightly, to 36 per cent from 34 per cent, and dial back on fixed income, to 32 per cent from 35 per cent.

Among stocks, 39 per cent of investors predict emerging markets 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.

Changes:

The outlook for US and emerging market stocks also changed substantially after the election. Forty-three per cent of investors surveyed before the election said emerging markets would be the best-performing equity market in 2017 compared to 31 per cent of those surveyed after the election. Meanwhile 46 per cent of those surveyed before the election said the US would be the biggest disappointment among global stock markets, compared with 31 per cent of those surveyed afterward. The proportion of investors who said longer-term government bonds would be the most disappointing fixed income asset class in 2017 rose from 63 per cent before the election to 76 per cent afterward.

On the other hand, investors say US stocks, medium- to long-term government bonds and, among alternatives, real estate could trail the pack. Institutions predict financials will be the best-performing stock sector in 2017, while utilities could deliver the biggest disappointment. In private equity, the best sectors will be media and telecom, infrastructure and health care.

Managing fees was the main reason for investors using passive strategies. Three-quarters of these professional investors said that individual investors are unaware of the risks of passive strategies and have a false sense of security about their use, the survey said.

By Siddesh Suresh Mayenkar Senior Reporter

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