Insights   •   Equities

New Research: Seeking Opportunity at the Top of the Cycle

Executive Summary

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.

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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 a Nordic pension with €11 billion in assets

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, unlessthey’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.

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The subject matter contained herein has been derived from sources believed to be reliable and accurate at the time of compilation, but no representation or warranty (express or implied) is made as to the accuracy or completeness of any of this information.Neither Institutional Investor LLC nor State Street Global Advisors accepts any liability for losses either direct or consequential caused by the use of this information. This document is provided for informational purposes only and does not, in any way, constitute investment advice. State Street Global Advisors, which commissioned this report, is independent of Institutional Investor LLC.

All text and content of this research report are the exclusive property of Institutional Investor LLC. The research and commentary in this document are intended to highlight results, trends, and patterns among respondents in this study. In no event should the content of this report be construedto constitute an investment recommendation or managerial advice from Institutional Investor or State Street Global Advisors, which commissioned this study.

The views and opinions of the respondents are not necessarily those of State Street Global Advisors. Views and opinions are subject to change at any time based on market and other conditions.

March 2019

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Expiration Date: 08/31/20202