One of the constant investor narratives of recent years has been the rise and rise of passives, but that looks to be changing, with large investors beginning to turn away from traditional passive investments.
This is the stark message from the latest Fidelity Global Institutional Investor Survey. It reveals that over the next six years institutional investors expect to shift their portfolios toward more active strategies and smart beta products – all at the expense of traditional passives.
Looking ahead to 2025, when asked to share their portfolio construction strategies, institutions with $1 bn or more in assets generally expect to make the most significant changes to their asset allocation, including increasing investments in active, non-traditional passive, alternatives and unconstrained strategies and derivatives.
In particular, 41 percent of respondents from these large institutions say they anticipate increasing their allocations to actively managed strategies by 2025. Twenty-five percent of large investors also say they would increase their exposure to non-traditional passive or factor-based funds. Only 5 percent indicate they would increase the size of their traditional passive position.
The Fidelity survey finds that institutions are pursuing different portfolio construction approaches partly because of their expectations for the future. Institutional investors say that when considering their investment portfolios, their top concern is a low-return environment (21 percent), closely followed by volatility (17 percent).
‘Institutions realize that in the long term, market activity may no longer be enough to generate returns, so they have to work smarter to reach their goals,’ says Jeff Mitchell, chief investment officer of Fidelity Institutional Asset Management, in a statement. ‘Institutions are restructuring their portfolios to reflect this changing investment ecosystem, whether by increasing allocations to certain investment styles or asset classes, or by embracing new investment strategies.’
The survey also finds that institutions recognize the influence of technology on the markets and portfolio strategies, with 62 percent expecting advances in technology – such as high-frequency trading algorithms and quantitative investment strategies – to make the markets more efficient.
‘Technology continues to fundamentally change the industry and how we think about investing,’ says Judy Marlinski, president of Fidelity Institutional Asset Management. ‘We encourage institutions to collaborate with their investment partners – investors and asset managers alike can work to foster a culture of innovation in investing, and support it by developing appropriate processes for due diligence and monitoring results.’
She adds that the changes revealed in the survey will be the trend among all sizes of investors: ‘Larger institutions may be leading the trend toward restructuring their portfolios, but we expect these trends to be adopted more broadly throughout the wealth management industry.’
The survey included responses from 905 institutional investors in 25 countries.