In the current market, traditional asset allocation has become a zero-sum game,” said John Hailer, chief executive officer of Natixis Global Asset Management 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.”
Nearly 60 per cent of investors in the Middle East and North Africa (MENA) region believe that an effective way of easing risk is to increase allocations to non-correlated assets, including private equity, private debt and hedge funds. Sixty percent of institutional investors based in the MENA region say it is essential to invest in alternatives in order to outperform the broader markets (compared to 49 per cent globally).
“MENA institutions are looking for better risk management and more reliable sources of yield. The majority are turning to alternative asset classes, particularly real assets, to deliver it,” said Fabrice Chemouny, Executive Vice President and Global Head of Institutional Sales for Natixis Global Asset Management.
The Natixis survey of 660 institutional investors includes corporate, public and government pension funds, sovereign wealth funds, insurance companies, and endowments and foundations collectively managing more than $35 trillion in assets.
Globally, institutions worry about their ability to fund liabilities in a volatile, low-rate market. In response, they are adapting their investment strategies, risk management approach and business operations to better meet their long- and short-term obligations.
Eighty two percent of MENA institutions say funding long-term liabilities is one of their biggest concern for managing risk, followed by the low yield-investing environment (78 per cent). Nearly seven in 10 (67 per cent) say meeting growth objectives and short-term liquidity needs is a challenge to their organization.
While funding for liabilities are listed as a key concern globally, a significant majority of MENA investors think other institutional investors will be able to meet their long-term liabilities, which is a clear point of divergence with the global view.
While costs are top of mind for institutions and many will increase usage of passive strategies in more efficient asset classes, active strategies still hold favor for pursuing better returns overall. Currently, 64 per cent of institutional assets are managed actively and 36 per cent are managed passively. Fifty-eight percent of investors say that, over the long term, active investments outperform passive ones. And, in the next 12 months, 67 per cent say economic factors, changing monetary policies and market volatility will favor active managers.
The majority of institutional investors agree that active management is a source of alpha (87 per cent), accessing non-correlated asset classes (77 per cent) and taking advantage of short-term market movements (71 per cent).
Globally, the vast majority of institutions is concerned over meeting its long-term objectives and is looking for more innovative LDI (liability-driven investing) solutions.
72 per cent of institutions say they are concerned about their ability to fund long-term liabilities, and 68 per cent say it is a challenge to manage uncertain liabilities linked to increased longevity. Although nearly three-quarters of institutions (73 per cent) say they have tools to manage liability assets, 78 per cent say they are looking for more innovative LDI solutions for today’s markets, a significant rise from 60 per cent in 2014.
“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.”
Globally, many institutional investors say it has become increasingly difficult to achieve alpha. However, more investors in the MENA region believe that there is alpha to be found in ESG investing than their global peers (71 per cent compared to 50 per cent globally). The survey also revealed that 30 per cent of MENA investors would use ESG solutions to generate higher risk adjusted returns over the long term or to benefit from new sources of diversification (25 per cent compared to 15 per cent globally).