The interlocking issues of the continuing low-yield environment, generating alpha and the ability to fund long-term liabilities were cited by the vast majority of institutional investors as key concerns, according to a global survey of 660 institutional investors by Natixis Global Asset Management.
In Asia, 85% of respondents (84% globally) said the low-yield investing environment is their biggest concern for managing risk, followed by funding long-term liabilities (84% vs 72% globally) and generating returns (73% vs 82% globally).
In Asia, diversification is also a key issue. Stocks and bonds are too closely correlated to provide distinctive sources of returns, according to 63% of respondents specifically in Asia compared to 54% globally.
Institutions are therefore turning to alternatives. The survey found that more exposure to alternative assets is the top priority of global institutional investors in 2016.
In Asia, 74% of respondents said they use alternatives as a primary goal to generate alpha versus 51% globally.
"58% of respondents believe that over the long-term, active investments outperform passive ones. That belief is in direct contradiction to data-based research from Morningstar"
More than half (66%) of institutional investors who were surveyed globally believe that increased allocations to non-correlated assets, including private equity, private debt and hedge funds can help offset risk.
“In the current market, traditional asset allocation has become a zero-sum game,” said John Hailer, chief executive officer of Natixis in the Americas and Asia.
“An investment approach that’s fit for modern markets is needed. Institutional investors are increasingly moving to a broader mix of non-correlated assets alongside traditional stocks and bonds.”
Active vs passive
Perhaps the most interesting survey finding is that 58% of respondents believe that over the long term, active investments outperform passive ones.
That belief is in direct contradiction to data-based research from Morningstar, which found that actively-managed funds “have generally underperformed their passive counterparts, especially over longer time horizons, and experienced higher mortality rates (i.e. many are merged or closed)”.
The survey report said that 64% of institutional assets are managed actively and 36% are managed passively.
Seeking better products
Concern about meeting long-term liabilities in Asia was cited by 84% of respondents compared to 72% globally.
A significant majority of global respondents (78%) said they are looking for more innovative liability-driven investing (LDI) products for today’s markets, up from 60% the previous year.
“As the population ages and people live longer, underestimating future liabilities is a significant risk for institutional investors,” Hailer said.
"Institutions are expressing growing demand for product improvements to better manage long-term liabilities. The findings of our survey continue to suggest that LDI innovation is not keeping up with the demands of institutional investors.”
The survey results are based on responses of 660 institutional investors, including corporate, public and government pension funds, sovereign wealth funds, insurance companies, and endowments and foundations collectively managing $35trn in assets.