Natixis’ Center for Investor Insight surveyed 500 institutional investors in the fall of 2017 about long-term objectives, short-term opportunities, and the concomitant pressures. In a new paper, Natixis discusses the Center’s takeaways from this survey

Geopolitical events are the most worrisome prospect on the minds of the decision makers at institutions looking ahead to 2018. The percentage of respondents who believe such events will have a negative impact this year is at 74%. The second most worrisome? Asset bubbles (65%).

Passivity is Overrated and Overcrowded

Another of the findings of the study is that institutions believe the passive space is over-crowded. More than three fifths (63%) of those surveyed said that the growth of passive investing has increased systemic valuation risk: 59% believe that flows into passive strategies artificially suppress volatility.

Related to this: institutions generally believe that markets have been rising of late largely on the strength of artificially low interest rates rather than real growth. So they also believe that the uptick in the use of indexes for passive investment has amplified this upward momentum. That, in their view, sets up problems they’ll have to face in 2018, because it means asset price bubbles may be bursting along the way, hence the prominence of that worry as mentioned above.

Over the course of the eleven year period ending on December 31, 2017, the S&P 500 generated 87% in total return, which is impressive since that period started off headed so markedly in the wrong direction. Through this period, too, the VIX declined, reaching an all-time low of 9.14% on November 3, 2017.

Under the circumstances described in the above paragraph, it is as the authors of the study point out not surprising that “there has been a steady flow of assets to passive investments.” But that flow may reverse, and the ongoing increase of interest rates may be the catalyst for that reversal. Three quarters of the respondents say that the market now favors active managers.