Geopolitical risk and interest rates biggest sources of market volatility for UAE investors, Finds Natixis Survey

Institutions seek new ways to meet long-term growth and liability goals by simultaneously mitigating and exploiting risk in low-yield, volatile market
Biggest increases in allocations for UAE institutional investors toward alternatives and equities while allocations to fixed income likely to decrease

Dubai, March 15, 2017

Market volatility, geopolitical risk and interest rates are top investment risks for UAE institutional investors, according to an international survey of institutional investors published today by Natixis Global Asset Management.

At 66%, geopolitical concern is the biggest source of market volatility for UAE institutional investors while interest rates (43%) have emerged as the second highest contributor to market volatility for the coming year. A higher proportion of UAE institutional investors also consider oil prices to be a more significant source of market volatility (20%) and investment risk (11%) compared to their global counterparts (18% and 7%, respectively). However, fewer UAE institutional investors (57%) believe institutional investors are prepared to handle risks related to investment performance in the next 12 months compared to global investors (62%).

The results were derived through a Natixis survey of 500 managers of public and corporate pensions, foundations, endowments, insurance funds and sovereign wealth funds in North America, Latin America, the United Kingdom, Continental Europe, Asia and the Middle East. Collectively, they manage $15.5 trillion in assets.

The findings provide insight into how institutional investors, largely considered to be the world’s largest, smartest investors, are using risk to their advantage. Meanwhile, 71% of institutional investors in the UAE think individual investors might be taking on too much risk in pursuit of yield.

In terms of returns, many institutions in the region are reevaluating the investment strategies they will deploy in pursuit of higher risk adjusted returns because of changing market assumptions. Less than half of UAE institutional investors believe their current return assumptions are realistically achievable and expect to decrease return assumptions in the next year. Following global trends, the biggest increases in allocations for UAE institutional investors will be toward alternatives and equities while allocating less to fixed income.

“While risk factors change over time, the challenge for institutional investor remains the same. And that is to deliver long-term results while navigating short-term market pressures,” said Jean Michel Bourgoin, Executive Managing Director for Middle East and North Africa (MENA). “Given their mandates, it’s not an option for institutional investors to avoid risk. They have to beat the odds or change the game, and they are doing so by reassessing risk and resetting investment priorities. Embracing risk and smartly managing it is a game-changer.”

In terms of funds management, active management could be in a position to thrive in 2017 and gain favor with institutions as more volatile markets create greater dispersion. UAE institutional investors believe the current market is likely to be favorable for active managers. However, they also think alpha is becoming harder to obtain as markets become more efficient. Nearly 77% of UAE institutional investors are willing to pay higher fees for potential outperformance.

Alternative investments are set to take on a key role in risk management in the region. Private debt and private equity could offer a strong alternative, in terms of return generation and diversification. UAE investors seem to be especially satisfied with the performance of private debt and the diversification it provides. However, two thirds of UAE institutional investors would invest more in private debt if there were a broader range of options indicating there are still inroads that can be made.

Global results highlights:

Pursuing growth: bigger role for real assets, alternatives

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. One reason for setting their expectations lower is the challenge of finding returns: 75% of those surveyed say alpha is becoming harder to come by as markets become more efficient.

While most are confident they’ll be able to meet their long-term liabilities, 62% think most of their peers won’t. Sixty-nine percent agree that traditional diversification and portfolio construction techniques need to be replaced with new approaches.

The survey found:

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.

Seventy-three percent think private debt provides higher risk-adjusted returns than traditional bond investments. The three areas they consider most promising are infrastructure, healthcare and the sector combining technology, media & telecom. Many also say they are likely to consider increasing use of direct lending (44%) and collateralized debt (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. As seen with their broader views on private markets, 63% of institutional decision makers’ primary goal for investing in real assets is earning higher returns.

Balancing growth, risk, liquidity and liabilities

While institutions think that alternatives help to diversify portfolios and manage risk, more than half (55%) report that their need for liquidity has limited their ability to invest in alternatives. Many institutional decision makers (71%) believe more stringent solvency and liquidity requirements established by regulators around the world have resulted in a greater bias for shorter time horizons and more liquid assets. This has proven to be a significant challenge to meeting liabilities that stretch out over multiple decades. Respondents say their top risk management concern is balancing long-term growth objectives with long-term liquidity needs.

ESG (environmental, social and governance) investing is taking on broader dimensions for investment teams, providing a measure for identifying companies and investment trends that may provide long-term growth potential to the portfolio. Close to 60% of investors surveyed say that considering ESG issues is a way to generate alpha. An equal percentage says it is a way to lessen headline risks, such as lawsuits, environmental harm or social discord. Sixty-two percent believe ESG will be a standard practice for all managers in the next five years.

Active management is better suited to generating risk-adjusted returns

Nearly 75% of institutional investors believe today’s markets are more favorable to active managers – an increase of 6% over 2015. The projection for passive has dropped steeply year over year. In 2015, they assumed a 9% increase in allocations to passive within three years, now they anticipate an increase of just over 1% by 2019. Asked to compare the relative strengths of active and passive investments, 86% say active is better suited to generating alpha, to generating risk-adjusted returns (64%), for accessing emerging market opportunities76%, and for ESG investing 75%.

While institutional investors see the value of passive investments for specific objectives, they see potential problems for individual investors who have come to rely heavily on indexing. For 75% of them individuals are not fully aware of the risks of indexing which may conduct them to a false sense of security about indexing.

The challenge of liability management

Liability management is top of mind for institutional decision makers. Seven in ten institutions surveyed have adopted asset-liability matching strategies to help them align asset sales and income streams to future expenses with the goal of managing liquidation risk. Many of these strategies have relied on high-quality fixed-income securities, but institutions are now using a wider range of instruments in liability-driven investing (LDI).

They include hedging strategies (used by 47%), inflation-linked bonds (44%) and nominal bonds (37%). But they are also looking for a broader set of options. About three-quarters of institutional investors (77%) say alternatives have an important role to play in LDI portfolio management, as they offer valuable diversification and risk mitigation and complement the overall portfolio.

A significant number (62%) believe that despite using LDI strategies, most organizations will fail to meet their long-term objectives. Three in five (60%) say there is a lack of innovation in LDI solutions, although not as many (41%) are willing to pay a premium for innovative LDI solutions.

-Ends-

Methodology
Natixis surveyed 500 institutional investors about their opinions on risk, predictions on asset allocation and views on market performance. The respondents included managers of corporate and public pension funds, foundations, endowments, insurance companies and sovereign wealth funds in North America, Latin America, the United Kingdom, Continental Europe, Asia and the Middle East. Data was gathered in October and November 2016 by the research firm CoreData. The findings are published in a new whitepaper, “Double Down.” For more information, visit www.durableportfolios.com

About Natixis Global Asset Management
Natixis Global Asset Management serves thoughtful investment professionals worldwide with more insightful ways to invest. Through our Durable Portfolio Construction® approach, we focus on risk to help them construct more strategic portfolios that seek to endure today’s unpredictable markets. We draw from deep investor and industry insights and partner closely with our clients to put objective data behind the discussion.

Natixis Global Asset Management is ranked among the world’s largest asset management firms.1 Uniting over 20 specialized investment managers globally ($877 billion AUM2), we bring a diverse range of solutions to every strategic opportunity. From insight to action, Natixis Global Asset Management helps our clients better serve their own with more durable portfolios.

Headquartered in Paris and Boston, Natixis Global Asset Management, S.A. is part of Natixis. Listed on the Paris Stock Exchange, Natixis is a subsidiary of BPCE, the second-largest banking group in France. Natixis Global Asset Management, S.A.’s affiliated investment management firms and distribution and service groups include Active Index Advisors®;3 AEW Capital Management; AEW Europe; AlphaSimplex Group; Axeltis; Darius Capital Partners; DNCA Investments;4 Dorval Finance;5 Emerise;6 Gateway Investment Advisers; H2O Asset Management;5 Harris Associates; IDFC Asset Management Company; Loomis, Sayles & Company; Managed Portfolio Advisors®;3 McDonnell Investment Management; Mirova;5 Natixis Asset Management; Ossiam; Seeyond;7 Vaughan Nelson Investment Management; Vega Investment Managers; and Natixis Global Asset Management Private Equity, which includes Seventure Partners, Naxicap Partners, Alliance Entreprendre, Euro Private Equity, Caspian Private Equity and Eagle Asia Partners. Visit ngam.natixis.com for more information.

1 Cerulli Quantitative Update: Global Markets 2016 ranked Natixis Global Asset Management, S.A. as the 16th largest asset manager in the world based on assets under management ($870.3 billion) as of December 31, 2015.

2 Net asset value as of December 31, 2016. Assets under management (AUM) may include assets for which non-regulatory AUM services are provided. Non-regulatory AUM includes assets which do not fall within the SEC’s definition of ‘regulatory AUM’ in Form ADV, Part 1.

3 A division of NGAM Advisors, L.P.

4 A brand of DNCA Finance.

5 A subsidiary of Natixis Asset Management.

6 A brand of Natixis Asset Management and Natixis Asset Management Asia Limited, based in Singapore and Paris.

7 A brand of Natixis Asset Management.

Press Contact:
Natixis Global Asset Management
Samia Hadj, Global Public Relations
Tel: +44 (0)20 3405 4206
samia.hadj@ngam.natixis.com