In the current investment environment marked by higher volatility and low yields, the vast majority of professional fund buyers, including discretionary portfolio managers and funds of funds, favour active management and alternative investments for alpha generation.
That’s according to a survey by Natixis Global Asset Management of professional fund buyers in 28 countries across Europe, the Americas, the Middle East and Asia.
The survey reveals geopolitical events (67 per cent), interest rates (49 per cent) and China market woes (36 per cent) as the top three sources of volatility for 2017.
The low-yield environment tops the list of risk management concerns (77 per cent).
Professional buyers believe that higher levels of market volatility are likely to result in greater dispersion in equity returns. Some 95 per cent of those surveyed said they would choose active management over passive investments for generating alpha, while active management is also the preferred route to gain exposure to non-correlated asset classes (74 per cent) and emerging markets (77 per cent).
Matthew Shafer (pictured), EVP of international distribution, says: “While keeping a close eye on political and macroeconomic shifts in Europe and Asia, professional fund buyers see volatility as an opportunity. That is why they are looking to active management to both generate alpha and manage risk.”
Although professional buyers anticipate greater volatility in the year ahead and are concerned about investors taking on too much risk, they are not shying away from adopting risk, which is reflected in their market outlook and asset allocation calls.
Professional fund buyers are resetting strategy to ensure they are positioned for volatile, uncertain markets. Three-quarters (74 per cent) pointed to alternative investments as a means to diversifying portfolio risk. More than half (54 per cent) also say it is essential to invest in alternatives in order to outperform the broad market. This correlates with MackayWilliams’ latest Fund Buyer Focus which showed a greater emphasis from professional fund buyers on alternative and thematic strategies.
“We are seeing a marked shift from the old passive and long only active model to a new mix based on a core of active and low volatility alternatives with the addition of liquid and illiquid alternatives,” says Shafer.
When it comes to asset allocation, the consensus view among professional buyers is that emerging market stocks will shine in 2017, with 47 per cent projecting this as the bright spot among equity sectors. In pursuing emerging market opportunities, fund buyers are looking to Asia Ex-Japan to provide the best performance in 2017.
