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BONDS and stocks are two asset classes which tend to move in opposite directions, making them solid hedges against each other. But not anymore.
According to a survey by Natixis Global Asset Management, about 77 per cent of the institutional investors in Singapore, and 54 per cent globally, say stocks and bonds are too highly correlated to provide distinctive sources of return.
To make matters worse, the accommodative monetary policy which has kept US interest rates artificially low for seven years, has made it increasingly difficult for institutional investors to pursue yield from traditional sources.
Hence, the search for alternative assets to help generate better risk-adjusted returns has become the top priority of institutional investors in 2016.
"In the current market, traditional asset allocation has become a zero-sum game," says John Hailer, chief executive officer of Natixis Global Asset Management in the Americas and Asia and head of global distribution.
Based on Natixis's fourth annual global survey of 660 institutional investors in 29 countries, the average institutional portfolio allocation includes 42 per cent stocks, 28 per cent bonds, 25 per cent alternative investments, and 5 per cent to cash and other instruments.
Given the current market forces, 50 per cent say they will up allocations in private equity, 48 per cent will increase equities, 46 per cent will increase investments in private debt, 41 per cent hedge funds and 34 per cent real assets. Most significant on positions to be trimmed are the 42 per cent who will reduce bond holdings.
Fabrice Chemouny, executive vice-president and global head of institutional sales of Natixis Global Asset Management - international distribution, notes that Asian institutional investors are particularly attracted by alternatives compared to their peers globally.
The survey shows a growing interest in private equity, with 73 per cent of investors in Singapore, compared to 60 per cent globally, planning to increase their allocations to this area.
Eight in 10 Singapore institutional investors, compared to four in 10 globally, see market volatility as the biggest risk to their organisation's investment performance in 2016. More than half of them say international monetary policy divergence will be the biggest source of market volatility for the year.
The majority say the low-yield investing environment is their biggest concern for managing risk, followed by generating returns and funding long-term liabilities as well as meeting growth objectives and managing short-term liquidity needs.
Despite these challenges, there is still a preference for active management of portfolios. Eight in 10 of Singapore institutional investors, versus six in 10 globally, say that over the long term, active investments outperform passive ones. They believe that economic factors, changing monetary policies and market volatility will favour active managers.
About 57 per cent of institutional assets in Singapore, compared to 64 per cent globally, are managed actively. Some 43 per cent are managed passively, compared to 36 per cent globally.
The annual survey was conducted in October 2015.