Institutional investors say market volatility will be higher in 2017

Institutional investors suggest world political and economic events could push the level of market volatility higher in 2017, finds a study by French investment house Natixis Global Asset Management.

As a result, investors plan to reset their portfolios, putting their confidence in active management and alternative assets as they seek to manage risk and boost returns.

Natixis surveyed decision-makers at 500 worldwide institutional investment firms on their market outlook and asset allocation plans for 2017 and beyond. Volatility tops the list of concerns for 2017, with 65 percent pointing to geopolitical events, 38 percent citing the US elections and 37 percent noting the potential for changing interest rate policies.

‘In volatile markets, institutions are looking to active management to strengthen returns and manage risk,’ says John Hailer, president and CEO of Natixis Global Asset Management for the Americas and Asia.

Especially in anticipation of higher volatility, institutional investors favor active management over passive. They also express concern over the market distortions caused by passive investing: 

• 73 percent say the current market environment is favorable to active management
• 78 percent say they are willing to pay a higher fee for potential outperformance
• 49 percent say passive investing distorts relative stock prices and risk-return trade-offs
•  64 percent say active management provides better risk-adjusted returns than passive.

Exactly half the surveyed institutional decision-makers across the globe plan to increase their use of alternative strategies in 2017, with two thirds (67 percent) using them for diversification and one third (31 percent) for risk mitigation. Emerging market equities, high-yield income and financials – predicted to be the best-performing stock sector in 2017 – are the other big winners for decision-makers.