On Not Using The Phrase ‘New Normal’ Here

Most of us who write about finance on a regular basis agree that the phrase “the n** n*****” and its variants has become a horrid cliché in recent years. If the crises of 2007-08 shattered the “old normal” beyond repair, they also inspired a quick effort to declare its replacement in some … um … novel equilibrium. Ian Davis of McKinsey was describing the “n** n*****” as early as March 2009.

Now, more than three years later, Natixis Global Asset Management has released results from its survey of institutional investors around the world (Asia, Europe, the Middle East, the United Kingdom, and the United States). The takeaway from the survey is that the institutions surveyed have indeed given up on any hopes for a less dramatic, less volatile environment. They have accepted volatility as the more recent median. Specifically, eighty percent of those surveyed say that volatility is here to say. An even larger number (84 percent) say that volatility creates opportunities for investors.

In the U.S.

This acceptance means that careful ongoing attention to risk has become the means of operations. In the United States specifically, 31 percent of institutions say that they monitor their risk budget daily to keep the overall amount of risk in the portfolio under check: more than half (53 percent) say that they do such monitoring on a weekly or monthly basis. Only 13 percent do so at intervals of a quarter or a year.

Even on the basics of portfolio theory there is willingness to adopt new techniques to cope with the changing world. Nearly two thirds of U.S. institutional investors (64 percent) say that traditional diversification and portfolio construction techniques need to be replaced. This is consistent with something that Charles Grace, of Family Office Exchange, told us in a recent interview. Not just institutions, but HNW individuals and family offices too, are “re-thinking traditional ideas about asset allocation and portfolio theory,” it seems.

But that theoretical view doesn’t necessarily translate into an acknowledgement that “we should change our allocations.”

As the above graphic indicates, more than half of the institutions questioned think their present allocation to PE, single-manager hedge funds, or funds of funds, is on target. Roughly equal numbers would like it to be higher as would like it to be lower. A remarkable 73 percent of respondents say that their multi-asset absolute return fund allocation is on target, and even more (78 percent) think the same of their infrastructure investments.

In the U.K.

In the U.K., too, the survey reports, recent changes are seen as permanent changes, and that volatility is at the heart of the change, the emerged equilibrium.

One hundred percent of the U.K. institutional investors questioned said that volatility creates investment opportunities, and 84 percent find that mitigating its impact on an investment is a difficult task. Nearly the same percentage describes the management of tail risk as a difficult task.

The Natixis report quotes Terry Mellish, head of U.K./Ireland business and global consultant relationships at Natixis Global Asset Management: “U.K. pension funds along with others, notably their U.S. counterparts, have embraced alternative strategies for some time but what has changed is the tone of debate. Alternatives in their many guises are here to stay at the heart of investment strategy as the struggle to close deficits and meet long-term liabilities intensifies in an uncertain economic and regulatory environment.”

In terms of actual versus targeted allocation, nobody in the U.K. (0 percent) find themselves below target in their allocation to single-manager hedge funds. Nearly three-quarters say they are on target.

There is an intriguing contrast between the U.S. and the U.K. in the above graphs. Specifically, in the U.S. the reported success of institutions in achieving their targets vis-à-vis private equity funds is much the same as their success vis-à-vis hedge funds. But in the U.K. there is a significant divergence. Barely half say they are ‘on target’ as to PE, whereas nearly three quarters say so vis-à-vis hedge funds. As noted, nobody in the U.K. thinks they are below target as to hedge funds, but more than one third of those asked say they are below target as to PE funds.

Germany and Switzerland

Natixis also released results specific to Germany and Switzerland. The trend here is toward more diversified portfolios including wider use of alternatives, as part of what Hervé Guinamant, President and Chief Executive Officer, Natixis Global Asset Management, International Distribution, calls “convincing solutions for volatility and risk” that will “deliver more durable returns in challenging market conditions.

Seventy eight percent of investors questioned in these two countries agreed that continuing volatility is a fact of life in the new economy, and 87 percent agreed that it provides its own opportunities.