Institutional investors are expressing confidence in the projected market conditions of 2022, but they also think individual investors are carelessly speculating on high-risk investments.
In fact, nearly half of institutional investors expect economic growth to return to pre-COVID levels in 2022, according to survey findings published by Natixis Investment Managers. Despite the threat of supply chain disruptions and ongoing COVID-19 concerns, institutional investors—armed with tactical allocation moves—see plenty of growth potential in a market they say is driven and distorted by fiscal and monetary policies, and which could spell trouble for unprepared individual investors.
The findings are based on a survey of 500 institutional investors who collectively manage $13.2 trillion in assets for public and private pensions, insurers, foundations, endowments and sovereign wealth funds around the world, including responses from nearly 100 institutional investors in the U.S. who collectively manage $1.3 trillion in assets.
Inflation ranks as institutional investors’ top portfolio risk concern in 2022, though most respondents (61%) think the current spike in inflation is temporary. In the U.S., a greater number of institutions (61%) see inflation as a more of a “secular trend” that will play out gradually. The presence of real inflation for the first time in more than a decade, coupled with expectations by 48% of institutional investors of a full economic recovery from COVID disruptions next year, may explain why 73% of institutions, including 83% in the U.S., expect policymakers to raise rates in 2022, the firm notes.
“Institutional investors are clearly telling us they expect the market to look very different next year than what it does today, and they are positioning their portfolios to withstand whatever is thrown at them,” notes Liana Magner, Natixis IM Executive Vice President and Head of Retirement and Institutional in the U.S. Magner observes that while inflation poses a number of long-range economic issues, interest rate policy presents institutional teams with immediate investment challenges.
“The upside is an expansion of investment opportunities and emerging growth potential in a market ripe for active management.”
Portfolio Positioning
Still, the survey found that few institutional investors are making dramatic allocation changes heading into the new year, but most will make tactical moves to position portfolios for opportunistic and risk-adjusted returns. Nearly half (48%) expect the spread between security returns to widen next year, creating greater potential to outperform benchmarks.
Overall, 35% of institutions plan to decrease their exposure to U.S. equities, allocating more to emerging market, European and Asia-Pacific stocks, the firm notes. As rates normalize, 68% of institutions say they will look at short-term bonds and ETFs to counter duration risk in their bond portfolio. Meanwhile, many are looking further afield for income, including 68% who say they are increasingly using alternative strategies over fixed income to generate yield.
Currently, 84% of institutions are investing in private equity, 81% in private debt and 81% in infrastructure, the findings show. Of those, 91% plan to maintain or increase their investments in private equity and private debt next year, while 97% say the same for infrastructure investments.
According to the firm, recent passage of the Infrastructure and the JOBS Act in the U.S. and other global actions appear to have boosted institutional investors’ confidence in both infrastructure investments and green bonds.
Individual Investors
Meanwhile, institutional investors expect higher volatility in stocks (75%), bonds (63%) and currencies (56%) in the year ahead, but they continue to manage toward a long-term return assumption of 7% (on average). Individual investors’ long-term return assumptions, however, are 14.5%, twice that of institutional investors and 174% more than the 5.3% returns financial professionals think is realistic, Natixis IM notes. “In many cases, [individual investors] ignored the fundamentals of investing yet still managed to do well for this year,” notes Dave Goodsell, Executive Director of Natixis IM Center for Investor Insight. “2022 may not be as kind, especially if investors have taken on too much risk, or are overly reliant on passive, index funds.”
Many institutional investors (58%) believe one reason the market is ignoring fundamentals is because of the widespread use of passive investments, which 67% say exacerbates market volatility when there are large flows into and out of passive index funds.
What’s more, nearly two-thirds (64%) of institutional investors believe that easier access to trading could ultimately threaten the retirement and financial security of many retail investors. Six in ten (62%) predict the meme stock phenomenon will continue to create risky financial bubbles. Moreover, they think the top contender for a major correction next year will be cryptocurrencies, which 72% of institutions believe are not an appropriate investment for most retail investors anyway.
Still, 41% of institutional investors now recognize digital or cryptocurrencies as a legitimate investment option, though most (87%) agree that central banks eventually will need to regulate them.
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