Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
Australian investors among most pessimistic about COVID-19
A total of about 260 global asset owners, including 30-odd Australian fiduciary investors, completed a survey instituted by research and asset manager allocation firm bfinance late last week on how they are responding to the current COVID-9 crisis. We are more pessimistic than most other big investors.
The survey also asked whether they were satisfied with how diversification strategies were delivering in in the March quarter this year. More than half of the funds felt they had some downside protection, but a lot of them think it hasn’t worked. Key results from the bfinance survey include:
- Australian investors are in the top three countries that have the most pessimistic outlook
- Liquidity risk is the dominant concern for investors over the coming weeks. With this in mind, 27 per cent of asset owners are wanting to rebalance their portfolio to prior asset allocation weights, but say “rebalancing is challenging” and are “holding off on rebalancing where possible” due to liquidity and volatility
- More than 50 per cent of investors had some equity downside protection (hedging) in place, and three quarters of those are either “very” or “somewhat” satisfied with how those hedges have delivered (only 25 per cent with equity downside protection in place are “very satisfied” with how those hedges have delivered)
- In terms of specific strategies, more than a third of the investors using investment-grade credit are “not satisfied” with the performance of these strategies, while 84 per cent of asset owners invest in private markets and tend be “satisfied” with their investments here (62 per cent).
During the last three weeks, the survey results say 11 per cent of investors have made “significant” dynamic and/or tactical changes to their portfolios, with another 33 per cent making “minor” changes. The results say market liquidity is seizing up and that is the dominant concern.
The bfinance survey results to be released today (Monday March 30), indicate, if you read between the lines, investors are worried.
Kathryn Saklatvala, head of investment content at bfinance, said: “Although markets and performance results are changing week by week, it is fascinating to get an early look at how so many asset owners are initially reacting to what’s happening within their portfolios. While strategies that are theoretically intended to provide some diversification are performing as planned for many, a very substantial minority have been disappointed.”
– G.B.
