Despite a low-yield environment that has made generating returns a constant challenge, global institutional investors are more confident in their risk management capabilities and generally more optimistic about global equity markets this year than last.
Still, most expect volatility in stock markets to continue, and maintain that managing sharp swings will be extremely difficult, according to a survey from Natixis Global Asset Management (NGAM).
Kinji Kato, executive managing director for Asia and Japan CEO at NGAM, says there has been a noticeable uptick in investor confidence for the first time since Lehman Brothers collapsed in 2008. He attributes this to aggressive monetary easing by developed-market central banks, most notably under Japanese prime minister Shinzo Abe's leadership.
“The US and Japanese central banks printing money to create market liquidity has given institutions comfort to take more risk,” Kato tells AsianInvestor.
Some 65% of institutional investors are more confident than they were a year ago on managing risk, although managing volatility remains a top concern, with 83% saying portfolio protection from dramatic swings will be particularly difficult this year.
“Institutional investors are painfully fearful of volatility and unnerving swings in portfolio values,” the survey says. The Nikkei 225, for example, plunged 7.6% on May 23 alone, representing the biggest single-day drop since the March 2011 tsunami, and marking a turnaround from its 50% rise since the start of the year to May 22.
Still, this has not curbed enthusiasm for equities. Twenty-seven percent of respondents to the survey – which includes private and public pensions, insurance companies and sovereign wealth funds – expect global equities to outperform this year, followed by domestic stocks (19%) and emerging market equities (15%).
As a result, more than half the respondents (57%) will add more global equity exposure this year, with 48% planning to boost local equity allocations and 40% to raise emerging market equity investments.
To balance the risks of equity volatility, many view alternatives as the only suitable option, with real estate a popular choice. Some 41% of investors anticipate an increase to property this year. German institutions are particularly bullish, with two-thirds saying they will invest more in real estate in 2013.
Conversely, US investors are more bearish on property, with only one in five anticipating an allocation increase this year. Looking ahead to the next three years, every country barring the UK and Spain will boost investments in real estate.
Meanwhile, 36% expect to pump more money into private equity funds in 2013. Institutions are less bullish on hedge funds, however, with only 19% anticipating putting more money to work in hedge funds this year.
Overall, 71% of investors expect alternatives to perform better this year than last.
While the eurozone crisis still weighs on investors’ minds, most say it is not impacting investment decisions nearly as much as a year ago. Roughly 64% claim their home governments’ fiscal situation does not significantly impact their decisions, and 57% say the same about other nations’ finances. Overall, geopolitical risk, global fiscal imbalances, tax policy, and regulatory changes have little or no bearing on how they invest.
Although pensions and governments are confident they will meet their future obligations, individual savers are in trouble. Some 70% of institutional investors say the average citizen in their home nation won’t have enough assets for retirement, with the outlook particularly dire in the US, Latin America and the UK.
“In light of the fact that many of these investors manage retirement assets every day, this is an important message that should resonate with both individuals and retirement policymakers to help drive better savings behaviours,” the survey notes.
“Many pensions, including the public Japanese pension system, have been guaranteeing high-yield returns. But we’ve been in a low-yield environment for many years. So this needs to change,” Kato says. “The older generation is okay. But the [outlook] for the younger generation is much more discouraging.”
Despite these concerns, over half or 54% are not incorporating asset-and-liability management (ALM) into their portfolio strategy. Only 26% of sovereign wealth funds and 32% of private pension funds practise ALM, compared with 70% of insurers.