Institutional Investors Feel Braced for Whatever the Market Throws Them

In the year ahead, institutional investors surveyed by Natixis Investment Managers rank volatility as their top portfolio risk (53%), with 77% saying they expect greater volatility specifically in the stock market and 67% expecting greater volatility in the bond market.

Almost half (48%) believe that equities are due for a correction in 2020. With the U.S. in the midst of its single longest economic expansion on record, and other markets continuing to shine, still institutions have some concerns that prices are inflated and stocks are overvalued.

Yet institutional investors aren’t making big changes to their portfolios, and instead, are waiting out the current cycle until they’re comfortable enough with market conditions to make any portfolio moves. “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,” says David Giunta, CEO for the U.S. 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.”

Institutional investors show a belief that active management will guide them through more volatile markets. Nearly three-quarters (74%) say the market environment in 2020 is likely to be favorable for active portfolio management. They continue to increase their allocations to active strategies while their use of passive strategies continues to decline. Current allocations are split 71% active and 29% passive, up from 64% allocated to active management and 36% to passive when surveyed in 2015.

Institutional investors’ projected allocations heading into 2020 remain relatively unchanged. Natixis found most have turned to the private markets, 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. Seven in ten (71%) institutional investors feel the return potential of private assets is worth the liquidity tradeoff.

Next year, 37% of institutional investors plan to increase their allocations to private debt as well as private equity (28%), real estate (29%) and infrastructure (32%). However, 86% of institutional investors are concerned about too much money chasing too few deals in the year ahead, and three-fourths wonder if public markets are now overvalued.

Preparing for the presidential election

In 2020, institutional investors will be watching the U.S. presidential election carefully. Overall, 64% project that the election cycle will result in market volatility. More immediately, 54% believe impeachment proceedings will have a destabilizing effect on the markets.

In terms of who wins, institutions are split on the performance outcome. Just over half (52%) think the market will respond favorably to a new president, while 54% see an unfavorable reaction should the Democrats win both houses of Congress. Elections may present some short-term performance concerns, but policy may have a longer-lasting impact, as 73% believe trade disputes will have a negative impact on performance.

Either way, institutions are deploying three key strategies to prepare portfolios for political risk. Most frequently they are looking to scenario analysis (48%) and establishing capital buffers and reserves (47%) to manage the risks. Nearly one-third simply say they will need to be nimble and agile in their approach in 2020.

Natixis surveyed 500 institutional investors that collectively manage more than $15 trillion in assets for pensions, insurers, sovereign wealth funds, foundations and endowments around the world.