Asset owners are going back to basics en masse. Institutional investors are writing large new mandates for global and developed-market equities, wrote bfinance in a quarterly report published this month. The agency, which advises more than 500 pension funds and other institutional investors worldwide, is also seeing increased interest in investment-grade strategies.
Bfinance bases its findings on searches written by institutional investment clients. “These give a quicker indication of where clients want to increase or change their positions than official asset allocation rates that are reviewed late,” the consultant explained.
In absolute numbers, searches for managers in private markets are the highest, but when it comes to the mandate size for which investors are looking for a new manager, equities take the lead.
Back to basics
“We see investor clients focusing on resilience, risk and revaluing the core of the portfolio - getting the basics right,” the researchers concluded in the report. “In equities, we see investors focusing on broad global mandates for developed markets and quality styles.”
A look at newly issued searches in the 12-month period ending 30 June shows that within equities, the focus has shifted from emerging markets to developed markets. 50 per cent of searches by institutional investors this year concern global equities, 17 per cent developed markets and 17 per cent emerging markets. A year earlier, the figures were 62 per cent, 0 per cent and 33 per cent respectively.
“New [equity] mandates are spread across different investment styles, although we find that many investors have an overarching focus on quality,” bfinance said of their experience in this regard. According to the consultancy, investors are reviewing and reassessing their equity positions. They are also considering whether to address certain style gaps or rebalance.
Bond trends
Within fixed-income portfolios, the consultant observes a move towards investment-grade corporate bonds, with clients attracted by both higher yields and the prospect of resilience. “We see an explicit intention to gain exposure to companies that have shown robust performance during economic downturns.”
In 2022, 8 per cent of bond searches by institutional investors involved a new manager for investment grade corporate bond investments. This year, the figure is 41 per cent. In comparison, 33 per cent of searches within bonds last year were about high yield, this year the figure is 24 per cent.
Finally, bfinance noted that the risk of rising interest rates and potential credit risks has driven investors towards government bonds as a means of diversification and risk mitigation.
60/40 portfolio
The ‹back to basics’movement does not mean that investors are returning to the massively dismissed 60/40 portfolio. Bfinance said that investors are looking at the topic of diversification especially following the positive correlation between bonds and equities. In doing so, the consultancy warns against overdiversification, which can undermine outperformance, lead to convergence to the benchmark and increase investment and management costs.
To mitigate this, investors are now rethinking the number and type of asset managers in a given asset class, according to the consultant.
Private markets
Their allocation may be pointing towards traditional categories; meanwhile, investors are still looking for less traditional methods to diversify their portfolios. Overall, more than half of new searches launched at bfinance this year are about private markets.
Most of these concern private debt, while the biggest increase in interest can be seen in infrastructure. Private real estate is actually declining this year in terms of investor interest.