Active Management Resurgence for 401ks?

It could happen.

It could happen.

Institutional investors anticipate a year of “dramatic change” in 2017, according to a new survey from Natixis Global Asset Management, and that (possibly) includes down-and-out 401k active management.

World political and economic events could push the level of market volatility higher in 2017, Natixis finds. As a result, institutional investors plan to “reset their portfolios, relying on active management and alternative assets as they seek to manage risk and boost returns.”

Natixis surveyed decision makers at 500 firms. Volatility topped the list of concerns, with 65 percent pointing to geopolitical events, 38 percent citing the U.S. elections, and 37 percent noting the potential for changing interest rate policies.

“Unprecedented economic and political forces around the world are the top concern for institutions in 2017,” John Hailer, CEO of Natixis Global Asset Management for the Americas and Asia and Head of Global Distribution, said in a statement. “In volatile markets, institutions are looking to active management to strengthen returns and manage risk.”

Pros Choose Active Management Over Passive

Especially in anticipation of higher volatility, institutional investors favor active management over passive. They also express concern over the market distortions caused by passive investing:

Over the longer-term, institutions project they will use passive investments less than they previously believed. They say 67 percent of their assets are actively managed and 33 percent are in index-tracking investments, and they expect the share of passive investments to rise only one percentage point, to 34 percent, in the next three years.

In a 2015 Natixis survey, investors expected 43 percent of assets would be passively managed within three years.

The main reason for using passive strategies, cited by 88 percent of respondents, is a desire to manage fees, but 57 percent said the prevalence of “closet indexers” – managers who charge higher active fees for index-like strategies that closely hug their benchmark – as another reason. Three-quarters (75 percent) of these professional investors say that individual investors are unaware of the risks of passive strategies and have a false sense of security about their use.

Move to alternatives tops asset allocation trends

Half (50 percent) of surveyed institutional decision-makers across the globe plan to increase their use of alternative strategies in 2017, with two-thirds (67 percent) using them for diversification and a third (31 percent) for risk mitigation. Emerging market equities, high yield fixed income and financials are other big winners.

The survey also found:

U.S. Presidential Impact

The responses also showed that institutional investors’ confidence suffered after the U.S. election. Natixis conducted the survey in two stages, with 340 investors polled just before the U.S. presidential election on Nov. 8 and 160 responses collected just afterward. Prior to the election, two-thirds of respondents expressed confidence in their organization’s ability to handle the risks associated with investment performance, which fell to only 53 percent among those surveyed after the election.

The outlook for U.S. and emerging market stocks also changed substantially after the election. Forty-three percent (43 percent) of investors surveyed before the election said emerging markets would be the best-performing equity market in 2017 compared to 31 percent of those surveyed after the election. Meanwhile 46 percent of those surveyed before the election said the U.S. would be the biggest disappointment among global stock markets, compared with 31 percent of those surveyed afterward. The proportion of investors who said longer-term government bonds would be the most disappointing fixed income asset class in 2017 rose from 63 percent before the election to 76 percent afterward.

A global wave of populism is upending conventional thinking about politics and economics. Central bank policies, which have driven investment performance for nearly a decade, are beginning to diverge. The U.S. Federal Reserve is likely to raise rates, while other central banks are challenged to scale their asset purchase programs. The upshots are concerns among institutional investors about volatility, geopolitical risk, and monetary policy, which we see them addressing using a three-part approach:

On the heels of a tumultuous political year, institutional investors believe that geopolitical volatility will translate into market volatility for investors in 2017. Navigating the volatility will mean resetting investment priorities and revisiting investment strategy.

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