The use of volatility-reducing strategies has increased as schemes look to dampen the impact of current market conditions on portfolios, according to investment data.
A study by Natixis Global Asset Management found 76 per cent of UK respondents intended to add strategies that limit exposure to market volatility in the next year. A further 70 per cent said they would employ absolute return strategies for the same reason.
Survey findings
There were 37 UK respondents to the survey
76% of respondents predicted difficulty in funding long-term liabilities
90% said low yields and weaker returns pose the biggest portfolio risk
Lee Dodds, investment consultant at LCP, said the use of liability-driven investment and diversifying out of equities were popular ways to reduce volatility.
“Most schemes are looking to [reduce volatility] through straightforward diversification of equity risk by investing in alternative assets which include absolute return funds, property or hedge funds,” he added.
Schemes could look to reduce equity exposure after a good run in equity markets in order to benefit from this volatility, he said.The survey reported 89 per cent of UK respondents thought mitigating the impact of market volatility would be difficult. This is up from 84 per cent last year.
Boris Mikhailov, principal at consultancy Mercer, said volatility was a key topic and consideration for schemes. “For defined benefit schemes the key priority is managing volatility relative to liabilities,” he said.Investment volatility in the form of inflation and interest rate risk is also a concern for schemes. Mikhailov said 80 per cent of volatility in portfolios came from these twin factors, but schemes are still underhedged. This has led to a rise in the use of LDI to dampen the volatility, he said.
There has been year-on-year growth for these volatility-mitigating strategies, said Terry Mellish, head of UK and Ireland business and global consultant relationships at NGAM.
“Volatility and tail risk are clearly at the top of people’s minds. They have tried to plan for the best and prepare as well as you can for the worst,” he said, adding that investors are increasingly resigned to the idea that shocks happen more often in recent times.
There were 500 global institutional investor respondents to the survey including public and private pension schemes. The majority of the UK’s 37 respondents were pension schemes.
