Time for New Investing Rules

Many institutional investors are exploring new investment strategies.

A survey of more than 500 institutional investors from Natixis Global Asset Management’s (NGAM) Durable Portfolio Construction Center found most say that traditional investing principles have outlived their usefulness. Five years after the financial crisis upended markets, many institutional investors say the old rules of investing no longer apply in today’s markets.  

In the U.S., institutional investors (88%) feel strongly that traditional portfolio construction and diversification strategies are not ideal for most investors, and 60% of global institutions agree. Additionally, more than 70%, including a high concentration of sovereign wealth funds, say setting asset allocation and taking tactical advantage of market movements is difficult.  

“The old road map no longer guides investors, and the new one is being drawn every day,” said John T. Hailer, chief executive officer of Natixis Global Asset Management in the Americas and Asia. “They need more tactical help with portfolio construction and asset allocation so they can build stronger, more durable portfolios that can better withstand the cycles.”

While 89% of institutional investors are confident in their ability to meet their own future obligations, that confidence does not extend to individuals saving for retirement. A large majority of institutions (81%) in the U.S. say the average citizen will not have enough assets in retirement, and seven in 10 (70%) globally say the same. Institutional Investors expressed greater concern in Latin America (88%) and the United Kingdom (84%).  

The widespread attraction to equities continues, with investors particularly drawn to global stocks. When asked to project which asset class will perform best this year, the top choice was global equities (27%), followed by domestic stocks (19%) and emerging market equities (15%). This optimism is reflected in most investors’ allocation plans for 2013, as 58% plan to increase their exposure to global stocks, 46% will add to their emerging market equity holdings and 42% will increase their weighting in domestic stocks.  

Lower yields have made the risk-reward tradeoff of bonds less appealing for many investors, as 43% say they plan to scale back on their domestic bond exposure in 2013 and 42% will reduce their global bond allocations. U.S. investors are slightly more optimistic within their own borders, with only 29% saying they will reduce their domestic bond allocations. Investors worldwide are bearish on gold and cash, as more than 80% anticipate lowering or maintaining their current allocations to each.

Most believe alternatives are essential to managing risk, and are adjusting their portfolios accordingly. Institutional investors have an above-average comfort level with alternative assets such as hedge funds, real estate, private equity and commodities. A large majority (85%) report that they own alternatives, and three in four say it is essential to invest in these strategies in order to diversify portfolio risk.  

Most (60%) plan to add to their alternative investments, or other assets that do not correlate with the broader market, in the next 12 months, with the most popular target areas being real estate (41%), private equity (36%) and infrastructure (30%).  

Most are also bullish on the near-term performance prospects for alternatives, with 71% predicting that the assets they own will perform better in 2013 than they did last year. Institutional investors in the U.S. are more cautious, with less than half (48%) projecting better year-over-year performance.  

NGAM’s 2013 institutional research study is based on field work conducted in 19 countries throughout the Americas, Europe, Asia and the Middle East. Telephone interviews were conducted in January and February with more than 500 senior decision makers from private pension plans (189), public pension plans (109), sovereign wealth funds (43), insurance companies (35), endowments/foundations (18), fund of fund companies (11) and asset consultants (97).