Natixis survey reveals preparations for volatility in 2020
The record highs for many market indexes may give way to riskier times ahead according to a survey of institutional investors.
And some of the world’s largest investors are also warning that individual investors are playing a risky game with excessive use of passive index funds.
Increased volatility is seen as the greatest portfolio risk for 2020 according to a global survey by Natixis Investment Managers and most institutional investors see no relief ahead from trade and low yield risks.
More than 7 in 10 respondents said that low rates have led to asset bubbles and 45% believe that central banks have little room to mitigate any new market challenges due to the low rate environment.
“Institutional investors have been steadily fortifying their portfolios in anticipation of inevitable changes in the market cycle that could make 2020 a bumpy ride for unprepared investors,” said David Giunta, CEO for the US at Natixis Investment Managers. “Despite a substantial amount of uncertainty next year, institutional investors remain focused on their long-term objectives and continue to see actively managed, diversified portfolios as a prudent path to outperformance.”
Volatility is most likely in the stock markets, respondents say, but they also see the bonds and currency markets as more risky in the year ahead.
However, they appear to be holding back from major portfolio pivots with average current allocations - 37% of their portfolios to stocks, 39% to bonds, 18% to alternatives, and 5% to cash – set to be largely unchanged in 2020.
Private markets are favoured, primarily for diversification (62%) and more attractive returns (61%) than they expect from traditional stocks and bonds.
Most institutions now use private equity (79%) and private debt strategies (77%), and two-thirds (68%) see private assets playing a more prominent role in their long-term portfolio strategy, despite associated liquidity risks.
Active vs. passive
The survey found that active management remains the choice of institutional investors to guide them through more volatile markets.
Nearly three-quarters (74%) of respondents say the market environment in 2020 is likely to be favorable for active portfolio management and current allocations are split 71% active and 29% passive, up from 64% allocated to active management and 36% to passive when surveyed in 2015.
Respondents believe that individual investors and the markets in general may be at risk from the excessive use of passive index funds. Seven in ten (73%) suspect individual investors will prematurely liquidate investments over recession worries, but 64% worry outsized flows into and out of index funds and other passive investments will contribute even more to volatility.
Seven in 10 respondents think that individual investors are unaware of the risks of passive investments.
“Previous studies have told us that institutions have been increasingly cautious in their outlook, and their portfolio positions reflect those concerns,” said Dave Goodsell, Executive Director of Natixis’ Center for Investor Insight. “The sentiment from institutional investors tells us that the question is not whether risk and volatility will impact markets and volatility, but when.”
