Concerns about global geopolitical tensions and persistent inflation coupled with the threat of a weakening economy leave little space for optimism among institutional investors. Markets in turmoil make finding pockets of opportunity and generating returns particularly challenging.
As Universal Investment we are one of Europe’s largest fund service platforms and Super ManCos with around 950 billion euro in assets under administration as of December 2022 and with locations in Luxemburg, Frankfurt/Main, Dublin and Krakow. For more than a decade we have been analysing transactions of our clients, which provides insight into investor behaviour. The findings offer a valuable tool for understanding market trends as well as a basis for detailed allocation discussions.
Traditional assets declining
Investors face the conundrum of rising interest rates and the threat of a weakening economy, with negative impact on investments in the two main asset classes, equities and fixed income. Investor reticence is clearly making itself felt, especially as the development from now on is pretty much anyone’s guess: How long and to what point will central banks continue to raise interest rates? Which companies are resilient enough to maintain sales and profits at good levels?
As a result, equity holdings on the Universal Investment platform are as low today as they last were during the Covid-19 pandemic in the summer of 2020, when markets were slowly recovering from the March crash. With bonds, on the other hand, investors seem to be taking a wait-and-see approach to their exposure. During the phase of negative interest rates, many had significantly reduced their fixed-income positions or at least let them shrink in relative terms in the asset allocation.
Equity and debt structures
For some years now, a growing number of institutional investors have been diversifying their portfolios by leveraging opportunities in the alternative investments sector: Among the client base analysed by Universal Investment, fund managers have expanded their exposure to equity and debt capital structures as well as to securitisations (bearer and participation bonds) and hedge-funds by almost 20 percent compared to 2021.
The volume of this multifaceted asset class has risen to more than 17 percent of total assets (as of September 2022). The rationale behind this popularity: equity investments or infrastructure projects can generate long-term returns, and these markets often do not correlate with movements in the traditional interest rate or equity environment.
Equity structures, such as private equity or private equity real estate are once again in high demand: compared to December 2021, their share has increased by an impressive 23 percent, accounting for 76 percent of alternative investments.
Debt structures, on the other hand, are considered a defensive element, especially in times of downturn. Private debt in corporate financing, investments in renewable energies or municipal loans account for a total of 17 percent of the asset class.
Pillar of strength
Short term average performance of institutional investments on the Universal Investment platform was minus 8 percent for the past year. Both medium- and long-term values have deteriorated as well. In this challenging environment, investments in alternative investments once again proved to be supporting pillars of the portfolios: Private equity scored with 9.8 percent in the one-year range and with 10.3 percent per annum over five years. It remains to be seen how rising interest rates and a more moderate inflation will impact the popularity of alternative investments.
Dr Sofia Harrschar is country head Luxembourg at Universal Investment, a knowledge partner of Investment Officer Luxembourg.