Sixty-five percent of institutional investors expect the bull market will end within the next 12 months, according to a report from Natixis Investment Managers, “Keep Calm and Invest On.” Seventy percent expect another financial crisis within the next five years.
Seventy-nine percent believe the current market favors active management, and their allocations to active strategies comprise 70% of their portfolios today, up from 64% in 2015. Sixty percent think they are prepared to handle the risks in 2019.
“Our research shows institutional investors are already positioned for potential market turbulence on the horizon,” says David Giunta, CEO for the U.S. and Canada at Natixis Investment Managers. “For these sophisticated investors, actively managed strategies and alternative investments are their tools of choice to help optimize their portfolios for the challenges ahead.”
Institutional investors’ long-term target return is 6.7%, and 77% believe this is realistically achievable. Fifty-six percent plan to maintain this goal in 2019, although 35% plan to lower it and 9% expect to raise it.
Despite bracing for increased volatility, institutional investors are not planning major changes for their portfolios in 2019. They expect to trim their equity allocations back from 38% to 36%, while raising their fixed income exposure from 37% to 38%, and cash, from 5% to 6%. Forty-one percent expect to decrease their exposure to U.S. equities, and 36% plan to increase their exposure to infrastructure.
The sectors that institutional investors think will deliver above-market returns are information technology (cited by 40%), health care (39%), energy (36%) and financial services (36%).
Asked what they see as the biggest threats to performance, 77% said geopolitical disruptions, such as tension with North Korea and Brexit. That is followed by trade disputes (74%), the unwinding of quantitative easing (65%), asset bubbles (60%) interest rate increases (56%) and market volatility (54%).
The areas where institutional investors fear there could be market bubbles are cryptocurrency (64%), technology (45%), the stock market (41%), bonds (33%), real estate (32%) and China (24%).
Eighty-four percent of institutional investors expect greater volatility in stocks in 2019, and 70% expect the same will occur in bonds.
Seventy-six percent expect the Federal Reserve will continue to increase interest rates in 2019. Fifty-three percent are concerned about the pace of the rate hikes, but only 27% are worried about the level of the increases.
Sixty-one percent believe that active investments outpace passive investments in the long run, and 78% are willing to pay a higher fee for outperformance.
They are also turning to private markets, with 51% saying that private equity or private debt are an important part of their portfolio. Seventy-one percent say these investments deliver higher returns, and 60% say they offer greater diversification. Sixty-six percent say that even though they command higher fees, private market investments are worth it for their potential performance.
Natixis Investment Managers’ findings are based on a survey of 500 institutional investors in 28 countries that CoreData Research conducted in October and November.