Market volatility is the most common factor preventing institutional investors in EMEA from focusing on long-term priorities, a new report released today by The Economist Intelligence Unit (EIU) reveals. This market volatility has prompted many investors to become more active in their portfolio management, while alternative investments have emerged as the preferred approach to mitigating portfolio risk.
Changes on the institutional investment horizon: EMEA investors balancing long-term liabilities with market opportunities, sponsored by Franklin Templeton Investments, is based on a survey of EMEA institutional investors and part of a global study. It shows that 42% of EMEA institutional investors say that market volatility is the biggest impediment to lengthening their investment horizon, with regulatory change, the global economic outlook and reputational risk also ranking highly. As a result, 40% of these respondents see themselves as being more active in the management of their portfolios, compared with 28% who say they will be less active. In general, respondents are seeking to manage their strategic portfolios more actively and say that they are becoming more tactical in their asset-allocation strategy.
When it comes to meeting their long-term investment objectives, concerns around Brexit, financial stability risks and concerns about the investment cycle weigh heavily on the region’s institutional investors. The report shows 40% of EMEA investors say political risk is the top challenge to achieving their long-term objectives, with 33% citing financial stability risks.
Alternative investments, such as private equity, private debt, and real estate, are the the top choice among institutional investors for mitigating risks. When asked about the best way to manage portfolio risks, 45% of say increasing use of alternatives, 42% say risk budgeting while 39% say asset-class diversification.
Over the next one to three years, 45% of institutional investors in EMEA plan to increase their Environmental, Social and Governance (ESG) portfolio allocations, while 17% plan to do so within the next 12 months, and 15% within the next three to five years.
Renée Friedman, editor of the report, says: “Despite the risks stemming from uncertain regional politics, further ECB and Bank of England monetary policies as well as continuing regulatory reforms, EMEA institutional investors remain focused on their long-term objectives. However, in a low yield environment, they will have to continue to look for new and potentially higher yielding opportunities in alternatives and in the ESG space if they are to meet their longer term liabilities amid changing demographic and environmental trends.”