Two-thirds of institutional investors believe the popularity of passive investments has increased systemic risk.
Natixis Investment Managers surveyed 500 global institutional investors (including managers of corporate and public pension funds, insurance funds and sovereign wealth funds) in North America, Latin America, the UK, continental Europe, Asia and the Middle East.
The survey revealed that institutional investors are concerned by the impact passive instruments have on market risk and asset pricing. Two-thirds (62 per cent) think the popularity of passive investments has increased systemic risk, with 61 per cent highlighting that flows into passive strategies have artificially supressed volatility.
More than half (52 per cent) of institutional investors also think passive investing has distorted relative stock prices and risk-return trade-offs.
Institutional investors are also expressing a preference for active management ahead of anticipated market volatility in 2019, with four in five (80 per cent) expecting to see increased market volatility over the next year.
The same proportion (79 per cent) suggest the current market environment will favour active portfolio management, a similar response (78 per cent) in 2018. Investors remain optimistic about returns but have slightly lowered the average return assumption for the year to 6.7 per cent. This compares with 7.2 per cent in 2017.
Louise Watson, managing director of Natixis Investment Managers in Australia, said the survey highlights that some of the trends the company has seen on the ground in Australia mirror the priorities of institutions globally.
“Institutional investors will continue to prioritise active management and investments in private assets to generate sustainable returns in more turbulent times. This is coupled with investors’ concern over the impact passive investments could have on market infrastructure and investment returns. We believe that, over time, passive investments will pose concentration risk, which could lead to systemic risk and see them truly tested when the next market downturn occurs,” she said.
“At the same time, greater transparency will show investors the difference between real active management and the closet index trackers imitations. Looking at 2019 and beyond, expected increased market volatility and a more challenging environment for generating yield means there will be a widening distinction between managers who can generate alpha and those who can’t.”