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.
Surge in manager searches as COVID lingers
Super funds and other asset owners are adapting to the lingering impact of the pandemic through a big jump in manager searches, according to the latest quarterly report from bfinance.
The global fund search and advisory firm has reported a 34 per cent increase in the number of searches in 2020 compared with 2019, with the aggregate asset size of the searches rising 61 per cent.
The report, ‘Manager Intelligence and Market Trends’, also shows a continuation of the trend for asset owners to adopt a more risk-on approach to their current portfolios and a strong jump in future allocations to private markets.
In the 12 months to December, searches for private markets managers jumped 51 per cent; by far the biggest increase of any asset class and just on twice as much as in 2019. However, within this class, direct real estate continued its decline. For the other broad asset classes, equities searches were up 24 per cent, fixed income up 16 per cent and diversifying strategies up 9 per cent.
The star performer in private markets was private debt (excluding private real estate and infrastructure), up from 15 per cent to 27 per cent of all private markets searches over the 12 months. A surprise performer was the relative newcomer to private markets, ‘multi-asset private markets’,
Frithjof van Zyp, senior director and head of Australia and New Zealand for bfinance, said that, while real estate had been hit hard during the pandemic, there were positives in the asset class. “On the flip side [from retail and offices] there’s continued growth in logistics and warehouses and in general property continue to provide strong diversification to public markets. For retail, the pandemic accelerated a trend which was already there.”
With private debt, he said: “Investors are concerned about the impact of the pandemic on the outlook going forward; whether there will be more stress or favourable lending conditions. We believe that making an allocation now makes sense as the market dynamics are favouring lendors and this will lead to strong vintages for funds raised in 2020-2021.”
He said that in Australia, bfinance was “wrapping up” a private debt search for a big insurance company, plus a search in unlisted infrastructure for another non-super fund.
“Globally, it’s a rising tide. We continue to go through the lower-for-longer phase and the hunt for yield remains a key issue. Add to this the pandemic – it’s not surprising to see more portfolio changes… Funds are also dealing with evolving ESG issues,” he said.
Fund managers often say that super funds, in particular, are less likely to make big changes to their portfolios during times of regulatory change and political uncertainty, such as right now. But there are also some unintended consequences of planned changes.
van Zyp said that it was possible that some super funds were reluctant to make certain changes to their portfolios now due to possible mismatches with listed market benchmarks from the introduction of Your Future, Your Super legislation.
In the private markets space globally, real estate searches were down from 31 per cent of the private markets total in 2019 to 16 per cent last year. Private equity was also down, from 23 per cent to 14 per cent, but infrastructure and ‘niche real assets’ down only slightly from 31 per cent to 30 per cent.
In the main equities category, there was a big swing to global equities, up from 25 per cent of all equities searches to 71 per cent, and away from emerging markets, other regional mandates and REITs. At the end of the December quarter, the average allocation to equities sat at 4 per cent above the long-term average.
In its markets summary, the report notes: “The positive news of late-2020 catalysed a major factor rotation, including a long-overdue spell of outperformance for ‘value equities’. In global equities, asset managers with this style clawed back some of their relative underperformance through the year. Low-volatility strategies ended the year with the weakest results in this asset class, trailing the MSCI World Index by 14 per cent on average.
“The upturn in sentiment left high-yield bond managers struggling to keep pace with index returns due to their strategies’ relatively low (opportunistic) exposure to CCC and lower- rated bonds. The same dynamics, however, boosted relative returns for investment-grade credit strategies.”
