Natixis Investment Managers has published a new survey this week covering professional fund selectors at firms managing over $30 trillion in total client assets, from wealth management, private bank, and insurance platforms around the world.

After a year of high inflation, geopolitical turmoil and high energy prices, a survey by Natixis Investment Managers shows that professional fund selectors are expecting more of the same in 2023, with 62 per cent globally, and 74 per cent in Asia, believing that a recession will be necessary in order to get inflation under control.

When asked about the year ahead, the survey shows that inflation (70 per cent) and interest rates (63 per cent) rank as the top portfolio concerns and a central bank error ranks as the biggest economic risk. Changing trade practices are also weighing on their minds, as 62 per cent of professional fund selectors worry that the move from global trade to more domestic production and friend-shoring will hinder growth.

These risks all come at a time when the wealth management industry is facing dramatic changes, as investors seek more comprehensive financial planning services and firms work to tailor their offerings to meet the evolving needs of clients. 

Despite the challenging outlook, professional fund selectors remain optimistic for the year ahead, with 73 per cent saying that they will maintain or increase average return assumptions of 8.8 per cent, the survey reveals.

Though few believe that they will need to make wholesale changes to portfolio strategy to achieve return expectations, they are planning small but significant shifts in allocations to navigate the uncertain economic and market environment, the firm continued.

Natixis IM surveyed 500 institutional investors in 29 countries throughout North America, Latin America, the United Kingdom, Continental Europe, Asia and the Middle East that collectively manage $20.1 trillion assets for public and private pensions, insurers, foundations, endowments and sovereign wealth funds around the world. The survey was conducted by CoreData Research in November and December 2022.

Shoring up client portfolios
While professional fund selectors see inflation as a key portfolio risk, they also see a potential opportunity in the interest rate hikes that come with it, the survey reveals. Three-quarters believe that rising interest rates will usher in a resurgence in traditional fixed-income, with 51 per cent saying that they will increase investments in government bonds, and another 46 per cent reporting that they will increase allocations to investment grade corporates.

On the equity side, professional fund selectors appear to be relatively optimistic for 2023, as they consider shifting equity weightings to capture the upside of market dislocations. Six in 10 are bullish on stocks, 9 per cent higher than institutional investors who were surveyed a month earlier.

Professional fund selectors also plan to mitigate risk through the continued use of alternatives. Almost six in 10 say they are recommending increased allocations in alternative investments due to higher levels of risk. Risk views run so strong that 63 per cent say they believe alternative investments belong in retiree portfolios to help mitigate their exposures, the firm said.

Within alternatives, professional fund selectors are most likely to increase allocations to infrastructure, followed by private equity, absolute return strategies, and private debt. When it comes down to it, 64 per cent believe that portfolios composed of 60 per cent equities, 20 per cent bonds, and 20 per cent alternatives will outperform the traditional 60:40 portfolio in 2023, the firm continued.

Active management stands out
Underpinning this, allocation calls show that selectors are looking to active investments as a critical tool for managing client portfolios in the current environment. Eighty per cent of professional investors say that active management is necessary to find alpha during a recession, and 72 per cent believe that active investments will outperform passive, the survey shows.

Additionally, 54 per cent of professional fund selectors anticipate that a recession will reveal key inadequacies of passive investments, and more than half worry that large flows in and out of passive investments will exacerbate already high levels of market volatility. This has prompted 59 per cent of professional fund selectors to consider increasing allocations to active funds this year.

Regulatory changes are driving interest in ESG  
Sustainable investing is expected to see the biggest allocation increase in 2023, with 61 per cent of professional fund selectors saying they will increase allocations, rising to 71 per cent in EMEA where MIFID III requires all financial advisors to discuss sustainable investing with their clients. Only 48 per cent of professional fund selectors in North America have plans to increase sustainable investments, the firm continued.

Many are also considering private assets to enhance their sustainability offering, with 30 per cent reporting that they will turn to private markets for impact investing. This is reflective of the broader trend toward private assets more generally. Even as the yield picture begins to change, 50 per cent say they will add to their private investments offering and 44 per cent believe private assets will provide a safe haven for investors. 

Model portfolios are also growing in importance for professional fund selectors, as they plan to manage client expectations and unify investment offerings, with 79 per cent reporting that their firm offers some sort of model program, the survey reveals.

Martin Herbon, CFA, head of global financial institutions, at Natixis IM said, “Professional fund selectors have genuine concerns about what 2023 will bring, as they anticipate elevated levels of inflation, rising rates, and increased market volatility. They see higher rates as driving a resurgence for bonds and are reallocating their client portfolios accordingly, with sustainable investing expected to see the biggest allocation increase in 2023.” 

“Private assets is a class growing in popularity with half of selectors surveyed planning to add to private investments offerings, and undoubtedly active investment will be at the fore, as 72 per cent believe active investments will outperform passive in this environment of higher inflation and rates,” he said.