Majority of professional fund buyers (82%) are confident that their average return target of 8.4% in 2018 is realistically achievable, a new survey by Natixis Investment Managers has revealed.
To achieve this, fund buyers are diversifying by sector (91%), implementing risk budgeting (80%) and increasing the use of alternatives (75%).
Natixis surveyed 200 professional fund buyers responsible for selecting funds included in private bank, insurance, fund of fund, and other retail platforms. Data was gathered in September and October 2017 by the research firm CoreData.
Fixed income no longer provides its traditional risk management role, and professional fund buyers are increasing the use of alternatives as well as reducing overall fixed income exposure.
Only 42% of fund buyers surveyed said they will mitigate principal losses in bond portfolios by managing the duration.
Within the fixed income space, fund buyers will look to shorten duration on bonds and implement alternatives to enhance income.
Meanwhile, in equities, there’s a preference for European and emerging market stocks.
With alternative investments, fund buyers turn to private equity to generate alpha and manage volatility with hedged equity and managed futures.
Matthew Shafer, head of global wholesale at Natixis Investment Managers said: ‘They see the long term value that can be generated by active management and they implement it through a broad range of strategies.’
He said the survey results suggest that professional fund buyers are more likely to make directional shifts in where they invest, rather than wholesale allocation changes.
Alternatives are used not just to diversify portfolios risk, but also to generating alpha.
About 70% of the fund buyers surveyed believe it is essential to invest in alternatives, while over a third of professional fund buyers see alternative investments as an effective strategy for generating alpha.
In anticipation of increased volatility, half of those surveyed see the potential of hedged equity strategies to absorb market shocks while 36% say managed futures are well suited to an increasing volatile market environment.
About 52% of fund buyers surveyed said managed futures could be used to broaden portfolio diversification. Other alternatives that can help to diversify portfolio risks are commodities, global macro, infrastructure and private equity.
Alternatives are also effective strategy for generating alpha.
About 58% of the fund buyers surveyed said their organization is increasingly using alternatives as a replacement for fixed income, with a clear preference for real estate (52%) to generate income.
Meanwhile, four in ten believe infrastructure is well suited to addressing income objectives, while more than a third see private debt as an effective income generation vehicle.
Interestingly, over half (58%) identified private equity as an effective strategy to generate stronger returns, with a third (31%) also highlighting private debt.
'Professional fund buyers are facing a range of portfolio objectives that are made challenging by the current market environment, Shafer said.
'Whether they’re looking to generate income in a low yield environment, obtain alpha while correlations are high, minimize the effects of volatility or enhance overall diversification, professional investors favour active management and expand their capabilities with alternative investments,' he added.
Professional fund buyers are also starting to see as much alpha benefit as risk management in environmental, social, and governance investments as 78% of individual investors worldwide want their investments to align with their personal values.