Natixis surveyed 660 institutional investors around the globe on their year-ahead market outlook and asset allocation plans. Institutional investors expect stocks to be the bestperforming assets in 2016, according to a survey released today by Natixis Global Asset Management. The study also found that investors believe global political tensions and changing interest rates will make markets volatile. In response, they plan to increase diversification and devote more of their portfolios to alternative assets.

The study found:

• Hopes high for equities: Institutional investors expect equities to perform better than any other asset category next year, with global stocks outperforming both U.S. and emerging markets equities.
• Increased use of non-correlated assets: Over the next year, most institutional investors will maintain or raise their holdings of non-correlated assets, including 50% who will increase private equity holdings and 45% who will increase private debt, while 41% will increase allocations to hedge funds and 34% will add hard assets such as real estate. The majority (56%) believes their alternative assets will perform better in 2016 than they have this year.
• Decreased use of bonds: On average, institutions currently allocate 28% of their portfolios to fixed income. Over the next year, 42% of institutions expect to decrease their allocation to fixed income, the largest allocation decrease of all asset classes. Just 16% plan to increase their allocation to fixed income.
• Top sources of market volatility: More than half of institutions (54%) predict global politics will be the No. 1 cause of market volatility next year. Investors say markets are also at risk of economic woes in China (49%), differing international monetary policies (47%) and changes in interest rates (46%).
• Uncertain performance: Institutional investors say market volatility is the biggest risk to their investment performance next year, followed by sluggish economic growth and monetary policy concerns.

“Central bank policies, market volatility and other outside events have a big influence on institutional investors,” said John Hailer, Head of global distribution and Chief Executive Officer of Natixis Global Asset Management in the Americas and Asia. “They are eager to improve their income and performance in this environment. We’re seeing a surge in demand for innovative strategies that target specific needs across more diversified, complex portfolios.”

Mixing active and passive management

The findings favor a hybrid approach to active and passive investing. The survey found institutions are using actively managed investments to generate alpha and for exposure to noncorrelated assets, while they use passively managed investments primarily for equities and to minimize management fees.

Notably, two-thirds of investors (67%) believe world economic factors and higher market volatility will favor actively managed assets over passive investments in 2016.

Changing rates? Investors juggle bonds

Many countries, including the United States, are on the verge of raising rates. Others are holding steady or have recently cut rates. The divergence in policy is unsettling to many institutions and could contribute to volatility next year.

If the U.S. Federal Reserve and other central banks raise rates from their historic lows, institutional investors are poised to make several portfolio modifications. The majority (65%) will move from longer-duration bonds to those with shorter durations. Other adjustments include reducing their overall exposure to bonds (49%), raising their allocations to alternative investments (47%) and using absolute return strategies (47%).

“In a high volatility market context, with divergent monetary policies and global political unrest, institutional investors are increasing allocations to alternatives in a hunt for yield," explains Christophe Point, Managing Director of Natixis Global Asset Management Distribution for France, French-speaking Switzerland and Monaco. “These strategies are a source of diversification, a critical component to building a more durable portfolio over the long term", concludes Christophe Point.