A new global survey of close to 500 institutional investors conducted by Natixis Global Asset Management – NGAM is keeping busy these days – points out a few common and a few not so common concerns for asset holders worldwide.

Not surprisingly, volatility features high on the list of priorities: 80% of institutions think it’s here to stay, 84% think it’s an investment opportunity, but, 74% find it tough to adhere to asset allocation targets in times of heightened volatility.

One third of respondents thinks it has had above average success in the past five years in constructing portfolios that reduced correlation among assets (aren’t we all above average?). Also, one third says their risk tolerance is lower than five years ago, one third says it’s higher, one third is the same (aka average).

What is interesting is that three out of four investors have changed their risk management approaches in the last five years. Nine out of ten institutions see increasing allocations to non-correlated assets and risk budgeting as an effective portfolio risk management strategy; other approaches include increased fixed income allocations (84%); global equities (79%); and currency hedging (76%).

Notably, two thirds of investors said the 2008 crisis has changed their investment philosophies and approaches.

Macro uncertainties are of great concern, but which ones? One third of global institutional investors see the contagion from the European debt crisis as the greatest source of market volatility over
the next two years (53% in the UK – might be the London weather). Other items keeping asset holders up at night are an uneven global economic recovery (16%) and political/regulatory gridlock in responding to sovereign debt levels (13%). 31% point to discovering unexpected sources of risk in their portfolio and 30% say it’s the inability to react quickly to volatile market conditions.

Not surprisingly, some 85% of institutional investors in Europe, including the U.K., agree that the
regulations imposed by the Alternative Investment Fund Managers Directive (AIFMD) will affect
fund managers negatively due to their broad scope.

Similarly 86% of institutional investors in Asia along with 76% of investors in Europe
agree that the staggered pace of implementing financial reform around the world (e.g. the U.S.,
Europe, Hong Kong) is creating more, not less, systemic risk. Investors in the Middle East were
less concerned (68%).

Alternatives to the rescue:

Two thirds of asset holders believe it is essential to invest in alternative investments to diversify portfolio risk and/or to outperform the broad market (good luck telling that to hedge funds in the last few years). The US especially is on board with this, with 73% in agreement.

For those that use alternatives (very few don’t, these days), 85% say they are pleased with the performance of those holdings, compared with 15% who are disappointed. Two thirds will keep the allocation as is, one quarter is likely to double it, and some 12% have buyers’ remorse. U.K. investors, at 44%, are the most likely to say they would raise their allocation to alternative investments (St. James is a nice area in London, can’t argue with that).

Get liquid.

Nine out of ten investors think increasing the use of liquid (more unconstrained) alternatives such as global macro or long/short equity strategies is an effective way of limiting portfolio risk. One third of them say their institution’s allocation to real estate is below target; 40% of investors in Asia and 39% in Europe report the same. 28% of global investors say their institution’s allocation to socially
responsible investing is below target.

Asked to select up to three priorities for the next 12 months, 27% say one of their institution’s top actions will be to pay more attention to correlations between asset classes. A quarter named increase holdings of safe cash-like investments as a top investment priority in the next year. A similar proportion chose use absolute strategies.

Amen.

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(c) Enskat Associates 2012