Future Market Expectations Leading Institutional Investors to Diversify

The Fidelity Global Institutional Investor Survey found that institutional investors around the world are looking for new sources of alpha (positive investment performance), particularly active, non-traditional passive, alternative, unconstrained and derivatives investments.

Institutions with $1 billion or more in assets under management (AUM) are looking to make the greatest changes to their portfolios by 2025.

Institutions are pursuing different portfolio construction approaches in part because of their expectations for the future. Twenty-one percent of all respondents said that their biggest concern is a low-return environment, followed by volatility (17%).

“Institutions realize that in the long term, market activity may no longer be enough to generate returns, so they have to work smarter to reach their goals,” says Jeff Mitchell, chief investment officer of Fidelity Institutional Asset Management. “Institutions are restructuring their portfolios to reflect this changing investment ecosystem, whether by increasing allocations to certain investment styles or asset classes, or embracing new investment strategies.”

The survey also found that 62% of institutional investors think advances in technology, such as high frequency trading algorithms and quantitative investment strategies, will make the markets more efficient.

“Technology continues to fundamentally change the industry and how we think about investing,” says Judy Marlinski, president of Fidelity Institutional Investment Management. “We encourage institutions to collaborate with their investment partners. Investors and asset managers alike can work to foster a culture of innovation in investing, and support it by developing appropriate processes for due diligence and monitoring results.”

The survey also found that large institutional investors, those with $1 billion of AUM or more, are more likely than smaller institutional investors to plan to decrease passive allocations and increase allocations to active and non-traditional passive, including factor-based, non-cap weighted or other “smart beta” strategies. Smaller institutions currently hold higher allocations of actively managed strategies (58% versus 44% of institutions overall).

Larger institutions are also more likely to increase private equity and infrastructure exposures than smaller institutions. And institutions of all sizes plan to decrease their exposure to developed market equity and shift it to emerging market equity.

Fidelity’s findings are based on a survey of 905 investors in 25 countries with more than $29 trillion in AUM.