Eight out of 10 fund buyers think their average return target of 8.4 per cent this year is achievable, research from Natixis Investment Management has revealed.
The company spoke to 200 professional fund buyers, with 78 per cent saying they expected the current volatility and had been surprised that the period of calm which had enveloped markets for much of 2017 and into 2018 had persisted for so long.
The fund buyers are divided on whether the rise in volatility is a positive or a negative for their portfolios this year, with 39 per cent seeing it as a threat, and 38 per cent seeing it as an opportunity.
The fund buyers said they will use a more diverse range of sectors, and increase the use of alternative investments as a way to mitigate risk in the current climate.
The traditional relationship between bonds and equities, whereby bonds perform better when equity market volatility is high, has broken down in the mind of 62 per cent of respondents, while 42 per cent are using short duration bond products to get returns from fixed income.
Investments in alternative assets have replaced all of part of the allocation to bonds for many investors, including Peter Elston, chief investment officer at Seneca.
He said he has been buying alternative property assets instead of bonds.
Matthew Schafer, head of wholesale at Naxitis, said: "The survey results suggest that professional fund buyers are more likely to make directional shifts in where they invest, rather than wholesale allocation changes.
"In fixed income they will look to shorten duration on bonds and implement alternatives to enhance income. In equities we’re seeing a preference for European and emerging market stocks. With alternative investments, they turn to private equity to generate alpha and manage volatility with hedged equity and managed futures.
"They see the long term value that can be generated by active management and they implement it through a broad range of strategies."
The average fund in the IA Mixed Investment 40 to 85 per cent shares sector in 2017 was 9.7 per cent.
The IA Flexible Investment sector returned 10 per cent in 2017.
David Scott, an adviser at the firm of Andrews Gwynne in Leeds, said the "normality" of investment returns in recent years will come to an end.
He said valuations mean that equities will return much less than their long-term average of 10 per cent in the years ahead.
He said equities may have been in a “cyclical” bubble, whereby investors know the assets are over priced but think they will be the ones who sell before the fall happens.
Mr Scott concluded his comments with the remark that recent bouts of volatility have ended because central banks have intervened, but that did not happen this time, as policy makers are determined to put interest rates up, and that should contribute to more volatility.
david.thorpe@ft.com
