New Research: Seeking Opportunity at the Top of the Cycle
This global survey of 200 senior institutional asset allocators assesses their views on equity markets over the next 12 months and offers insights into the strategy adjustments they might make as a result.
While the end of 2018 may well have signaled the end of the long-running bull market, this research program reveals how institutional investors will adapt their strategies amid attenuated market returns and higher volatility.
Investors are likely to embrace active equity strategies that span both a broader universe of potential investments and more diverse sources of data to inform investment decisions. At the same time, investors are unlikely to move reflexively into active equities. Instead, they are likely to use active equities when — and only when — they are governed by well-informed investment hypotheses.
Survey Data and Conversations with Investors Reveal Four Key Themes
1. Lower market returns as signs accumulate that equity markets are approaching a transition
Nearly one-half of respondents say it’s likely that market returns will be substantially lower in the year ahead. “We expect a positive market return over the next 12 months, but we also see increased volatility,” says the portfolio manager at an €11 billion Nordic pension.
2. Increasing volatility and uncertainty
The positive expectations for equity markets are tempered by caution as investors note an increase in volatility, and nearly all expect the market to reach an inflection point in the next year. “We’re seeing the repricing of risk, and the theme for the next 12 months will be volatility and dispersion by asset class and by region,” says the head of equities at a Dutch pension with more than $400 billion under management.
3. Expanding the universe of equity opportunities
In preparation for a market shift, investors are broadening their universe of potential equity strategies, including an increased appetite for emerging markets. Instead of regional and sector approaches, for example, some are starting with strategies themselves. “We are taking a holdings-based approach, and considering the best geography or sector for each strategy. We don’t necessarily manage by sector or to targets, unless they’re within the strategies themselves,” says the CIO of a $153 billion US state teachers’ pension.
4. Openness to compelling alpha opportunities
Asset owners remain committed to active equity strategies. They are especially supportive of active quantitative strategies that draw on sophisticated analytics, highly diverse sources of valuation signals, and factor-based smart beta strategies. “We have an active quant equity portfolio, which we use to reduce volatility and generate returns,” says a head of equities in Europe with $200 billion under management.