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The coronavirus pandemic has upended the global economy this year, and anxiety about its long-term effects tempers institutional investors' optimism for growth in 2021, according to a new survey from Natixis Investment Managers.
Institutions see alpha opportunities amid rising volatility and a market inching forward, but 78% think the stock market's current pace of growth is unsustainable, and they expect performance in the year ahead to be hard won and fragile.
Markets have proved remarkably resilient during this tumultuous year, and 64% of investors surveyed said they intend to keep as is or even to raise their return assumptions.
The survey found institutional investors' long-term return assumption is 6.3% on average, down 60 basis points from 2019. Insurers have cut their return assumption even more sharply, from 6.5% to 5.5% on average.
The survey results showed that institutions' broad asset class allocations will remain relatively unchanged, with 36% in stocks, 40% in bonds, 17% in alternatives and 6% in cash.
Yet institutional investors are taking advantage of what they expect will be increased dispersion in the markets in 2021, making many tactical adjustments within asset classes, notably these:
- Trimming U.S. equities, and increasing European, emerging market and Asia/Pacific stock exposure
- Decreasing exposure to government bonds, and adding investment-grade corporate debt and securitized loans
- Broadening alternative strategies with more private equity and infrastructure investments
"With the pandemic, politics and global economies at an inflection point, institutional investors are positioning their portfolios to navigate short-term volatility while anticipating the long-term impacts of this year's massive economic and market interventions," David Giunta, chief executive for the U.S. at Natixis Investment Managers, said in a statement.
"Investors' outlook reflects deep concerns about the lasting consequences of the extreme measures needed to cushion the financial blow of the pandemic. However, they also see opportunities to find value through active management, thoughtful portfolio allocation and diversification."
CoreData, a research firm, conducted a survey in October and November among 500 managers of corporate and public pension funds, foundations, endowments, insurance funds and sovereign wealth funds in North America, Latin America, the U.K., Continental Europe, Asia and the Middle East that collectively manage some $13.5 trillion in assets.
Defensive Positioning
In the year ahead, 58% of institutional investors expect value to outperform growth, while 53% expect large cap to outperform small cap, according to Natixis.
Slightly more than half of institutional investors think emerging markets will outperform developed ones, though the vast majority agree on the need to be more selective in pursuing emerging market opportunities.
Despite pushback on the size and influence of Big Tech, seven in 10 institutional investors expect the growth of technology companies to surge ahead. They see information technology and health care as the big winners in next year's market, and energy, real estate, consumer discretionary and financials as underperformers.
Forty-four percent of survey participants believe a stock market correction is due, and 41% say the same about the real estate sector, as do 39% about the tech sector and 29% about the bond market.
