Major investors around the world - including family offices - fret the most about military and political conflicts, overtaking concerns on the economics front.

A global survey of institutional investors, including family offices and banks, finds that geopolitics has now become their top worry, eclipsing their fear of rising interest rates and economic slowdown.

The report was issued by Allianz Global Investors, and fieldwork was conducted among 755 organizations, collectively representing $34.2 trillion in assets under management in North America, Asia-Pacific and Europe. The study is called the AllianzGI RiskMonitor.

Some 44 per cent say that geopolitics represent a major risk to investment performance – ahead of a global economic slowdown (41 peer cent) and rising interest rates (32 per cent).

Worries about a potential clash between North Korea and its neighbours – and the US – over the former’s nuclear weapons program have helped fuel alarm. The rise of political populism, concerns over the US administration’s ability to deliver on corporate tax cuts and other measures also contribute to unease.

“This study highlights the extent to which geopolitical uncertainty, including the ongoing tension in North Korea, which has only increased since we conducted our survey, is weighing on investment decisions. Financial markets have never operated in a vacuum, but geopolitics now appears to be having a greater impact than at any point in recent memory on how global investors are behaving,” Neil Dwane, global strategist at AllianceGI, said.

“Add into the mix that 31 per cent of investors also told us that US politics is an investment concern, and it becomes clear that politics is really piling pressure on markets. As a result, investors are increasing their focus on risk management and downgrading their return expectations as they struggle with a risk-return conundrum, despite the recent strong run in equity markets. The question on investors’ minds is whether markets have priced in all of the risks,” Dwane continued.

Event risk and equity market risk have also risen sharply up institutional investors’ agenda over the last 12 months, the report said. For example, more than nine in 10 investors (91 per cent) see event risk as a threat, compared with only three-quarters in 2016. Equity market risk has taken a similar prominence, weighing on the minds of 90 per cent of investors (2016: 77 per cent). Almost three-in-five investors (59 per cent) said recent political events have led to an increased emphasis on risk management in their institution.

In their quest to balance risk and return, active management comes to the fore as two-thirds (65 per cent) of investors say that actively managed investments play an important role in portfolios in the current market environment.

The findings also show that investors face a risk-return headache because they are trying to achieve the most effective balance of risk and return in uncertain markets. This caution is reflected in return expectations for the coming year, with more than half (51 per cent) lowering their targets despite a strong recent performance by equity markets.

A majority of investors – 53 per cent – are willing sacrifice upside potential so as to protect against shocks.

Institutions were interviewed during April and May this year.