Equities and managing downside risk are the key focus areas for global institutional investors in 2015, according to a survey report by Natixis Global Asset Management.
The survey covered 642 institutional investors in 27 countries with $31trn in collective assets under management.
Of the respondents, 43% expected stocks to be the strongest asset category next year, followed by 28% who believe alternative assets will be the top performers.
Less confidence was placed in bonds (13%), real estate (7%), energy (3%) and cash (2%).
Return expectations for next year on average across institutional investors were 6.9% after inflation.
Risk has also become a key issue, with 38% of respondents planning to lower portfolio risk in 2015 compared to 16% who do not plan to.
"The current market environment makes it difficult for institutions to earn the returns that are necessary to fulfill both short-term and future responsibilities," said John Hailer, president and chief executive officer for Natixis Global Asset Management in the Americas and Asia.
"Building a durable portfolio with the proper risk management strategies can help investors strike a balance between pursuing long-term growth and minimising losses from volatility."
Institutions view geopolitical events as the top potential external threat to investment performance next year (17% of respondents), followed by European economic problems (13%), slower growth in China (12%) and rising interest rates (11%).
As for internal portfolio risk, investors said they believe ESG investing can reduce risk as well as provide returns.
ESG investing mitigates risks such as loss of assets due to lawsuits, social discord and environmental disasters, according to 55% of respondents. About the same percentage said ESG investing has long-term growth and alpha benefits.
New sources of alpha
Institutional investors are increasingly moving into more alternative assets, driven by perceived difficulties in managing liabilities linked to longevity, according to the survey.
According to 75% of institutions, markets are becoming more efficient, making alpha harder to obtain.
Traditional asset allocation is losing ground and alternative assets, which are seen as a new source of alpha, have growing appeal.
To manage liabilities and longevity risk, alternatives are necessary, according to 71% of respondents.
"Despite the cautiously optimistic outlook for 2015, Asian institutional investors are positive about their investments in alternatives, particularly toward real estate," said Fabrice Chemouny, executive vice president and global head of institutional sales.
"Asian institutional investors are showing strong interest in property and a large majority (85%) is planning to maintain or increase their portfolios' current level of real estate.
"We continue to foresee strong growth in alternatives across Asia as institutions increasingly see these investments as critical to generate alpha, reduce high market correlations and manage liabilities and longevity risk."