The Best and Worst Asset Classes of 2016 | Chief Investment Officer

Institutional investors are hopeful about the stock market but fearful of volatility in 2016, according to a report by Natixis Global Asset Management.

Of the survey’s respondents, 77% said they expect equities to be the top-performing asset class next year. In particular, 42% of respondents favored global equities, while 33% preferred US equities. The S&P 500 gained 1.6% in 2015 to December 8, according to data provider FE Analytics, despite a turbulent summer.

“We’re seeing a surge in demand for innovative strategies that target specific needs across more diversified, complex portfolios.”Emerging market stocks were also well liked, cited as a potential top performer by 25% of investors. The MSCI Emerging Markets index lost 15% in dollar terms so far in 2015, according to FE Analytics.

However, investors said they were concerned about market volatility in 2016, labeling it the biggest risk to investment performance. In particular, respondents were worried about the effects on markets of political turmoil, economic problems in China, diverging international monetary policies, and changing interest rates.

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Additionally, 84% of investors said they were concerned about the low-yield environment.

“Central bank policies, market volatility, and other outside events have a big influence on institutional investors,” said John Hailer, Natixis CEO.

As a result, investors said their primary goals for 2016 were balancing risk and return and managing volatility in investment returns.

Currently, the average institution dedicates 42% of its portfolio to stocks, with 28% allocated to bonds and 25% in alternatives. Over the next year, investors said they plan to add non-correlated assets and private investments to diversify their portfolios and improve alpha.

“We’re seeing a surge in demand for innovative strategies that target specific needs across more diversified, complex portfolios,” Hailer said.

Another broad asset class that will perform well in 2016, according to the survey, is alternative investments, favored by 63% of respondents. A majority of investors said they believed alternative assets will perform better in 2016 than they have this year.

Half of the respondents said they will increase private equity holdings, while 48% said they plan to increase their stock allocation. Additionally, 46% said they will increase private debt, and 41% said they will invest more in hedge funds.

Meanwhile, 42% investors said they expect to cut their bond allocations—as bonds, along with commodities and fixed income, were selected as the worst performing asset classes for 2016.

Investors also said they intend to make portfolio adjustments when interest rates rise, with 65% planning to ditch longer-duration bonds for those with shorter durations. Other strategies for coping with interest rate changes were reduced overall bond exposures, increased use of alternative strategies, adoption of more absolute return strategies, and geographic diversification.

Unipension, one of Denmark’s biggest pension managers, is to close down after losing two of its three primary clients and founding members.

The DKK 117 billion ($17 billion) group’s CEO Cristina Lage has resigned over the split. A clash of views among senior staff members led to the breakup, according to a statement by the two departing funds’ chairs.

The industry-wide pensions for Danish architects (Arkitekternes Pensionskasse) and veterinary surgeons (PJD) have quit Unipension—which they helped establish in 2008—over a disagreement about cost cutting and the overall direction of the partnership.

They had been unable to agree “to move fast enough in the direction we wanted,” said the leaders of the exiting funds.

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The two pensions take DKK 20 billion ($2.9 billion) in assets with them, and 18,000 members. Both are set to appoint Sampension as administrator and asset manager when Unipension shuts down at the end of 2016.

The decision leaves one retirement system—public-sector academics’ MP Pension—as Unipension’s only client. MP Pension is by far the biggest of the three funds at DKK 96.6 billion ($14 billion), according to its latest half-year report.

Each of the three participating funds had a 33.3% stake in Unipension and shared the costs, meaning PJD and Arkitekternes subsidized the much larger MP Pension.

In addition, they failed to agree on the creation of a “fund broker” arrangement, which the exiting funds believed would generated revenue and reduced costs. Unipension was founded in 2008 on the hopes that the three funds would move closer together. Instead, the chairmen said, the trio moved further apart.

CEO Lage resigned over what the company has described as a skilsmisse—literally, a divorce. Lage will exit early in the New Year, with chief finance officer Jens Munch Holst set to oversee the wind-up.

Tina Moses, president of MP Pension, maintained that the remaining fund was of sufficient size to continue to operate independently. She admitted that short-term costs may rise, but said MP Pension would “work to reduce extra costs” and implement “strategic initiatives around the future development” of the fund.