TOKYO--(BUSINESS WIRE)--Conventional financial models and investment theories often failed in the wake of the global financial crisis. As a result, more than two-thirds (68%) of Asian institutional investors believe they need to replace traditional diversification and portfolio construction techniques with new approaches. Volatility remains a concern, with 29% calling contagion from the European debt crisis the top source of market volatility over the next two years, although just 4% say a “hard landing” by the Chinese economy would be a significant source of volatility, according to a new study by Natixis Global Asset Management (NGAM).

The results are part of a survey of 120 institutional investors from Asia. The research was conducted by OnResearch in June-July, 2012 and commissioned by the Durable Portfolio Construction Research Center of NGAM, the world’s 13th largest asset management firm.¹

“Asian institutional investors have been shaken by the failure of conventional investment theories to protect assets and produce returns,” said John Hailer, chief executive officer of Natixis Global Asset Management - Asia and the Americas. “We’ve found that they are applying the lessons they’ve learned to create more durable portfolios. Increasing the use of alternative investments and making smart use of traditional asset classes is more likely to help them reach their goals in the current volatile markets, which appear to be here to stay.”

Institutional Investors: The Old Rules of Investing No Longer Apply

Solid majorities of Asian institutional investors have lost faith in traditional views of investing. Two-thirds (66%) say that data showing that longer holding periods decrease the likelihood of a negative annualized return are no longer valid; 62% agree that conventional 60/40 portfolios no longer are the best way to pursue returns and manage risk.

Institutional investors are looking to new approaches. Almost three in 10 (27%) investors say that increasing their allocation to alternative/non-correlated assets is one of their highest priorities over the next 12 months.

Lessons Investors Say They Have Learned

Asian institutional investors have learned lessons from the crisis and are turning them into action. Among the lessons:

• New approaches to risk management. Four in five institutional investors (81%) say they have changed their approach to risk management in the past five years, and 68% are more confident that their current strategy is right for today’s volatile markets. Nearly all investors (91%) believe that increasing the use of liquid, more unconstrained alternatives such as global macro or long/short equity strategies is effective for managing risk.

• Market volatility is an investment opportunity; manage it accordingly. Three-quarters (76%) of institutional investors in Asia find that market volatility is the “new normal” for investors, and four in five (82%) agree that volatility provides investment opportunities. A significant majority (71%) agree that the best way to temper market volatility is to increase allocations to non-correlated assets.
• Active management is essential for reducing correlation. Approximately one-third (34%) say that paying attention to asset-class correlations is a top priority in the next 12 months. Nine in 10 (91%) say increasing allocations to non-correlated assets is an effective way to reduce risk and 69% say that it is essential to invest in alternatives such as hedge funds, private equity or venture capital in order to diversify risk.
• Alternative investments are needed to outperform. Alternatives are important not only for diversification but also for performance. The majority (59%) believe it is essential to invest in alternatives in order to outperform the broader markets. An overwhelming majority (82%) Asian investors say they have held alternatives for five years or longer, the highest level among any of the regions studied.
• Concentrated correlations between asset classes can affect returns. Only 27% say they have had above-average success in the past five years at constructing portfolios that reduce correlation among assets and just 18% rate their institution’s capabilities as above-average for identifying when assets grow too correlated to the broader markets.
• Satisfaction with alternative investments. Eight in 10 (83%) institutional investors report being pleased with the performance of their alternative investments and 86% say that, if they had to do it all over again, they would maintain or increase their allocation to alternatives. More than half (52%) expect that the alternative strategies they are investing in will outperform last year’s returns.

“Asian institutional investors, like their counterparts around the world, are implementing the tenets of durable portfolio construction to better manage risk and volatility and improve performance,” said Kinji Kato, Executive Managing Director, Asia and CEO of Natixis Asset Management Japan Co., Ltd. “Institutions are adopting consistent portfolio construction processes, focusing more on risk management, maximizing diversification, looking to alternative investments and making smarter use of traditional assets. In a world in which investors face substantial challenges, they are taking proactive steps to generate results.”

Looking Ahead: Investors Face Challenges in Meeting Goals

Half (50%) of Asian institutional investors say that contagion from the European debt crisis is the biggest worry keeping them up at night; nearly three in 10 (29%) predict it will be the most significant source of market volatility over the next two years.

Other global economic and political policies also weigh heavily on investment decisions, with nearly all (92%) saying that government debt levels influence their decisions, followed by central bank/monetary policy (87%).

Regulation’s Unintended Consequences

Increasing financial regulation around the world could have unintended consequences, say Asian institutional investors:

• 86% say that the staggered pace of implementing financial reform around the world is creating more, not less, systemic risk.

• 80% say that mark-to-market regulatory requirements will prevent investors from being able to capitalize on market opportunities.
• 80% say that global financial regulatory reform could result in less, not more, transparency on correlated credit/equity exposures, counterparty risk, etc.

Methodology

The telephone survey of 120 institutional investors in Asia was conducted by OnResearch in June-July, 2012. Institutional investors surveyed manage or oversee corporate pensions, public/government pensions, fund of funds, sovereign wealth funds, insurance reserves/liabilities, and/or endowments/foundations. The median asset level managed by Asia-based respondents was approximately $15.4 billion. The Asia survey is part of a larger global study of 482 institutional investors in 13 countries in Europe and the Middle East, as well as the U.K. and U.S. A copy of the global survey highlights is available at www.ngam.natixis.com/pressroom.

About Natixis Global Asset Management, S.A.

Natixis Global Asset Management, S.A. is one of the 15 largest asset managers in the world based on assets under management.¹ Its affiliated asset management companies provide investment products that seek to enhance and protect the wealth and retirement assets of both institutional and individual investor clients. Its proprietary distribution network helps package and deliver its affiliates’ products around the world. Natixis Global Asset Management, S.A. brings together the expertise of multiple specialized investment managers based in Europe, the United States and Asia to offer a wide spectrum of equity, fixed-income and alternative investment strategies.

Headquartered in Paris and Boston, Natixis Global Asset Management, S.A. has assets under management totaling $711 billion (€560 billion) as of June 30, 2012.² Natixis Global Asset Management, S.A. is part of Natixis. Listed on the Paris Stock Exchange, Natixis is a subsidiary of BPCE, the second-largest banking group in France. Natixis Global Asset Management, S.A.’s affiliated investment management firms and distribution and service groups include: Absolute Asia Asset Management; AEW Capital Management; AEW Europe; AlphaSimplex Group; Aurora Investment Management; Capital Growth Management; Caspian Private Equity; Darius Capital Partners; Gateway Investment Advisers; H2O Asset Management; Hansberger Global Investors; Harris Associates; IDFC Asset Management Company; Loomis, Sayles & Company; Natixis Asset Management; Natixis Multimanager; Ossiam; Reich & Tang Asset Management; Snyder Capital Management; and Vaughan Nelson Investment Management.

Natixis Global Asset Management, S.A. also includes business development units located across the globe, including:

NGAM Singapore (name registration no. 5310272FD), a division of Absolute Asia Asset Management Limited, which is authorised and regulated by the Monetary Authority of Singapore (Company Registration No. 199801044D) and holds a Capital Markets Services License to provide investment management services in Singapore.

NGAM Securities Investment Consulting (Taipei) Co., Ltd., a Securities Investment Consulting Enterprise, which is authorised and regulated by the Taiwan Financial Supervisory Commission.

Natixis Asset Management Japan Co., Registration No.: Director-General of the Kanto Local Financial Bureau (kinsho) No. 425. Content of Business: The Company conducts discretionary asset management business and investment advisory and agency business as a Financial Instruments Business Operator.

The information contained herein is intended for information purposes only and does not constitute an offer of financial services or investment advice.

¹ Cerulli Quantitative Update: Global Markets 2012 ranked Natixis Global Asset Management, S.A. as the 13^th largest asset manager in the world based on assets under management as of December 31, 2011.

² Assets under management (AUM) may include assets for which non-regulatory AUM services are provided. Non-regulatory AUM includes assets which do not fall within the SEC’s definition of ‘regulatory AUM’ in Form ADV, Part 1.