Asset allocators have come crawling back to equities, according to bfinance, while high-growth managers have led the rebound in an “abrupt style reversal”. But hopes for a meaningful market rebound could be misplaced.
Private markets remain the favourite asset class of allocators around the world, but they’ve also been inching back to equities after spurning them during the market ructions of 2022. Half of all new equity manager searches in asset consultant bfinance’s database came during the first quarter of 2023, representing a “significant shift in sentiment” supported by easing inflationary concerns and a re-evaluation of style, size, and the worth of active management in their equity exposures.
Global equities were of particular interest, accounting for 59 per cent of all new searches – a chunky rebound from 42 per cent in the previous 12-month period. But asset owners are fretting further market upheaval, with a number of manager searches including downside protection, relative volatility reduction and resilience through different market environments as objectives.
“The equity team’s activity over Q1 included style-focused searches spanning classic quality, quality growth, and quality value, and minimum volatility,” bfinance says in the latest edition of its quarterly manager intelligence report. “Mandates saw a mix of discretionary and systematic interest, and both pooled fund and separate account structures. The investor preference for broad global and global emerging markets over narrower country and regional-specific searches has clearly continued into 2023, but the first quarter did see a return to some developed market regional searches with most interest in European equity.”
High-growth equity managers have led the rebound in an “abrupt style reversal”, returning +11 per cent vs the MSCI ACWI net of fees, while low-vol and income managers lagged with mid-single-digit negative returns against the benchmark. Only a third of global large cap and all cap managers added value over the ACWI, while almost two-thirds of emerging market managers added value, with “outperformance across every style composite in Q1”.
Meanwhile, questions about the robustness of portfolios has seen more scrutiny applied to the inputs used for portfolio modelling, including the reliance on “point estimates” of risk and return; asset owners and their consultants should instead be focusing on expected return ranges, the bfinance report says. Engaged investors are also getting more involved in the modelling process rather than “simply deferring to a consultant’s model”.
“Some investors are expressing the desire to use their own forecasts for key global macroeconomic variables (such as GDP, CPI, interest rates and so forth),” the report says. “Some are wanting to dig deeper on how asset classes are modelled and include their own beliefs in the process: in a recent engagement, for instance, the investor expressed a more negative sentiment on hedge fund outcomes over the medium term and it was important to incorporate their beliefs in a consistent manner across all asset classes.
“Modelling assumptions for private market strategies also tend to be a subject of debate. Return expectations become even more controversial in periods where there is very high dispersion of return between stronger and weaker performers.”
And despite some positive economic developments – and bfinance’s Risk Aversion Index moving out of bearish territory – the “current mix of growth and inflation is not favourable for risky assets” and market hopes that stocks will rebound at the end of the current rate cycle could be misplaced. Still, multi-asset managers spent the quarter building up their allocations to risk assets.
“Average equity allocations among multi-asset strategies tracked by bfinance had declined to 28 per cent in the fourth quarter of 2022 , representing their lowest level since the Global Financial Crisis,” the report says. “The first quarter of 2023, however, saw managers moving to ride resurgent equity markets despite a concerning macroeconomic picture. Average allocations to equities among this cohort neared 34 per cent – just one percentage point shy of their long-run average over the past decade.”
Established in the UK more than 20 years ago, bfinance now has offices in 10 locations including Sydney where the Australia and NZ business is headed by Frithjof van Zyp.
Lachlan Maddock is editor Investor Strategy News (Australia)