With the potential for increased market volatility in the new year, institutional investors are focused on providing downside protection to their portfolios. And as interest in responsible investing increases, they’re also rethinking shareholder primacy.
Volatility was cited as the top risk to portfolios in a survey of global institutional investors released on Wednesday by Boston-based Natixis Investment Managers. More than half of those surveyed (53%) cited volatility, followed by interest rates (50%) and a credit crunch (37%).
Institutional investors also said they were gearing up for an upcoming year of slower economic growth, rising public debt and Brexit complications; and more than half (58%) forecasted that the next global financial crisis would occur within one to three years.
Yet, institutional investors weren’t making major changes to their portfolios, the survey found. Instead, they were aiming to protect on the downside through active management and diversification.
“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,” said David Giunta, CEO for the U.S at Natixis, in a release.
Near three-quarters of survey respondents (74%) said that the 2020 market environment will be favourable for active management. Their current allocation split is 71% active and 29% passive, up from 64% active and 36% passive in the 2015 survey.
Allocations remain largely unchanged at, on average, 37% stocks, 39% bonds, 18% alternatives and 5% cash. However, fine-tuning occurs within asset sleeves, with the survey finding notable decreases in exposure to U.S. equities and government debt, and increased exposure to emerging market stocks, investment-grade corporate debt, real estate/REITs, private debt and infrastructure.
Six in 10 institutions were using private assets for diversification and better returns, and 37% of institutional investors planned to increase their allocations to private debt next year, as well as to private equity (28%), real estate (29%) and infrastructure (32%).
Institutional investors consider activism, ESG
In addition to downside protection, institutional investors are also reconsidering conventional wisdom that company shareholders should be prioritized over other stakeholders.
Most Canadian institutional investors (91%) agreed that maximizing shareholder returns can no longer be the primary goal of a corporation, according to the 2019 Edelman Trust Barometer, also released on Wednesday.
Rather, business leaders must balance shareholder needs with those of employees, customers, suppliers and local communities to drive long-term business success and lower the risk of multi-stakeholder activism, the release said.
One reason that consideration of all stakeholders is important is to circumvent employee activism. Most survey respondents (81%) said companies with activist employees were less attractive as prospective investments.
Almost half of survey respondents said they look for companies that maintain a healthy company culture, and more than one-third said they wanted companies to showcase how they actively address social issues.
Further, if Canadian institutional investors believed change was necessary at a company they invested in or recommended investing in, most (86%) said they’d support a reputable activist investor.
Two-thirds of Canadian institutional investors also indicated they had increased their allocations to companies with ESG key performance indicators, and 60% voted their shares more often for board candidates who would increase the company’s attention to ESG issues.
About the Edelman survey: The research comprised 607 institutional investors, including financial analysts, chief investment officers and portfolio managers across six countries (Canada, the U.S., the U.K., Germany, the Netherlands and Japan), representing more than $9 trillion in managed assets. Data fieldwork was conducted by Edelman Intelligence between Aug. 30 and Sept. 30, 2019.
About the Natixis survey: The firm surveyed 500 institutional investors, including managers of corporate and public pension funds, foundations, endowments, insurance funds and sovereign wealth funds in North America, Latin America, the U.K., Continental Europe, Asia and the Middle East. Data were gathered in October and November 2019 by research firm CoreData.