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Chris Jackson, Natixis

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Institutional investors embrace risk in pursuit of better returns and yield

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Faced with volatility, greater risks and still-low yields, institutional investors are raising their exposure to higher-risk assets in pursuit of better returns, according to an international survey of institutional investors published by Natixis Global Asset Management.

At the same time, investors are doubling down on risk management to better balance long-term growth objectives and liquidity needs, whilst underlining the need to find better ways of identifying risk across their portfolios.
 
Natixis surveyed 500 managers of public and corporate pensions, foundations, endowments, insurance funds and sovereign wealth funds in North America, Latin America, the UK, Continental Europe, Asia and the Middle East. Collectively, they manage USD15.5 trillion in assets.
 
In the UK, over half of institutional managers surveyed (55 per cent) feel they can handle near-term market risk despite greater volatility, which they say poses the biggest risk to their performance. However, their top organisational concern is low yield.
 
Given the prospect for greater volatility and low interest rates, few UK institutions are relying on traditional portfolio strategies to meet their performance goals. In their efforts to manage the risks, some 90 per cent (83 per cent globally) believe risk budgeting is effective in managing risk, while 92 per cent prefer diversifying holdings across sectors, 75 per cent seek currency hedging, and 77 per cent look to increasing their use of alternative investments. 
 
The survey also reveals that the percentage of UK institutions using alternatives to manage risk has exploded globally from 53 per cent in 2015 to 76 per cent today. In addition, 56 per cent report that their organisation is investing more in illiquid assets today compared to three years ago.
 
“While risk factors change over time, the challenge for institutional investors remains to deliver long-term results while navigating short-term market pressures,” says Chris Jackson (pictured), deputy CEO of Natixis Global Asset Management – International Distribution. “Given their mandates, avoiding risk is not an option for institutional investors. They have to beat the odds or change the game, and they are doing so by balancing risks and embracing alternatives to traditional 60/40 portfolio construction, but always with an eye on their long term, objectives.”
 
In examining their goals, 68 per cent of UK investors believe their return expectations are achievable, but confidence may not be as strong as it seems on the surface. More than half of the UK institutions surveyed (55 per cent) expect to decrease return assumptions in the next 12 months – citing the challenge of finding returns to lowered expectations: 68 per cent of those surveyed say alpha is becoming harder to come by as markets become more efficient.
 
While most are confident they will be able to meet their long-term liabilities, 63 per cent think most of their peers will not. Some 66 per cent agree that traditional diversification and portfolio construction techniques need to be replaced with new approaches.  

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