When you’re handing out billion-dollar mandates, managers will “part the sea for you”. But there’s more than just returns to be weighed when answering the question of what makes a good external manager relationship.
A coalition of Australian and British pension funds representing A$3.25 trillion of workers’ retirement savings has called on the Starmer government to reform policy settings so they can tip more money into the energy transition in the UK.
New equity allocations on the radar of optimistic asset allocators
The post-Covid years have been marked by significant uncertainty for markets generated by central banks’ attempts to unwind extraordinary monetary policy – and the inflation it was partly responsible for creating – with a minimum of damage.
But with 2024 starting on a high note and a potential transition from a sustained regime of interest rate hikes to possible cuts later in the year, asset allocators are feeling more optimistic.
“Last quarter, (investors) across the globe were displaying a degree of hesitancy in their investment decisions, with a year characterised by persistent market, macro and geopolitical disruptions that rippled through the investment landscape,” bfinance writes in its latest manager intelligence report.
“Yet pension funds, endowments, insurers and other institutional investors appear to be gaining confidence, moving forward with implementing both strategic realignment and changes to their asset manager roster in a fundamentally altered macroeconomic climate.”
That’s most visible in the surge of equity manager search activity, with the asset class accounting for 33 per cent of all manager searches in the bfinance database for the 12 months to March 31 – almost doubling from the previous year. While global developed market equities are the most popular category, it was regional developed market strategies – Europe, US, Japan and Canada – that saw some of the biggest surges in interest.
“Nonetheless, considerable macroeconomic uncertainty persists and continues to affect decision-making,” the bfinance report says. “Investors continue to acclimatise to a world of higher interest rates as central banks continue their persistent battle with elevated levels of inflation, particularly in more developed markets.
“Indeed, a hoped-for rate cut in Q1 2024 – which many anticipated following signals from the FOMC and Federal Reserve in late-2023 – did not materialise. Forecasters are now broadly anticipating that interest rates will be held at their current level or reduced only modestly, rather than expecting multiple rate cuts through 2024.”
The interest in equities is a continuation of strong investor demand from the tail end of last year, with alpha primarily driven by growth-oriented investment styles while value, income and low vol strategies lagged the MSCI ACWI, underperforming by a margin of 1-3 per cent. Notable allocation activity included the return of China mandates after a short hiatus, and the bfinance report notes that the “scarcity of AI-themed high-growth” stocks in the emerging markets meant that a diverse array of investment styles managed to contribute positive excess returns.
Listed real assets were also in demand, while their unlisted counterparts went backwards, with illiquid asset classes constituting 43 per cent of all manager searches compared to 58 per cent at their peak.
“The decline was most visible in the infrastructure asset class: this sector represented just seven per cent of private markets searches (three per cent of all bfinance client mandates), down 22 per cent of private market searches (13 per cent of all mandates) the previous year,” the report says. “Private debt and private equity activity, conversely, remained very robust. Moreover, sentiment towards real estate has visibly warmed and natural capital searches continue to rise.”
Noise around an “ESG backlash” also does not appear to have affected demand for sustainable investing and climate-oriented investing.
“Both strategic support required by investors (particularly for impact/climate goals) and manager search activity (e.g. ESG or impact investment mandates) have continued strongly and indeed risen,” the bfinance report says.
“The more visible change is to be found on the side of asset managers: some of the world’s most prominent investment companies are visibly repositioning their messaging to re-frame ESG as a matter of client choice rather than intrinsic firm level philosophy.”
