Spike in bfinance Risk Aversion Index indicates degree of market uncertainty and investor concern
As post pandemic economic recovery stalls, investors focus on real return, income generation and diversification
On average, active equity managers underperformed falling markets by 0.4% in Q1 2022, while there was a mixed picture among fixed income and diversified strategies managers
16th May 2022, London – The new quarterly report from independent investment consultancy, bfinance—focusing on institutional investor activity, asset manager performance and market trends—sees the post-pandemic economic recovery stalling in Q1 2022 as a result of geopolitical tensions and a series of macroeconomic shifts adding fuel to inflationary pressures.
With inflation rising, institutional investors such as pension funds, endowments and insurers are seeking to enhance sources of real return, income and diversification. The report illustrates an emphasis on improving portfolio resilience, with a growing number of investors seeking ad hoc support for Strategic Asset Allocation and Portfolio Design, reviewing exposures across and within asset classes. Meanwhile, Russia’s invasion of Ukraine has also sharpened investors’ focus on ESG matters.
Key findings from the report show that post-pandemic economic recovery has stalled, with bfinance’s Risk Aversion Index rising from 0.50 (modestly risk averse) to 0.79 (markedly risk averse) in Q1 2022. Investors have reduced Russian exposure and increased their focus on Emerging Markets, Real Estate, Leveraged Loans and High Yield Debt. The outstanding performers for the quarter were in the Liquid Alternatives segment, with Global Macro and CTA strategies delivering strong returns.
New manager search activity
Manager search trends give a useful immediate insight into institutional investor sentiment. Illiquid strategies represented 46% of all searches initiated in the 12 months ending 31 March, only marginally down on the previous year’s figure. Private Markets manager search activity was dominated by private debt—including niche alternative finance strategies—and real estate. Real Estate accounted for 26% of all new manager searches in Private Markets, up from 15% the previous year, and a large proportion of this (42%) was for Real Estate Debt—which affords a protective and direct link to inflation.
Public Equities represented 25% of all searches to the year ending at Q1 2022, up from 21% a year prior. Within the asset class, global equity searches declined from 70% to 42%, while Emerging Markets searches surged from 11% to 35% and a growing proportion of clients sought carbon or climate reporting.
Fixed Income searches rose year over year, from 11% to 15% of all manager searches, as investors sought to mitigate potential losses relating to rate hikes. Demand for Investment Grade fixed income mandates plummeted from 39% of all fixed income searches at this time last year to just 7%, counteracted by strong manager selection activity in High Yield, Leveraged Loans and Emerging Market Debt.
While the overall percentage of manager searches in Diversifying Strategies (Hedge Funds, Multi Asset, Liquid Alternatives) dropped from 17% to 14%, Hedge Funds dominated figures—buoyed by strong performance through the Covid-19 era.
Managers moved swiftly to dial down risk as market volatility returned to markets in the first part of 2022, and investors who expected the recovery to continue unabated into 2022 had to recalibrate their expectations quickly as global equity markets fell in Q1. Evidence of that recalibration is reflected in the bfinance Risk Aversion Index, which is driven by a range of indicators including implied volatilities, gold prices, CDX and others. The indicator, which was trending higher—towards slightly more risk averse positioning—in Q3 and Q4 2021, moved sharply into risk-off territory in Q1 2022, rising from 0.50 to 0.79.
As a result of geopolitical and macroeconomic pressures, bfinance saw a significant increase in year-over-year engagement activity focused on Strategic Asset Allocation (overall) and Strategic Portfolio Design (specific area). Investors are seeking a clearer understanding of monitoring / risk exposures, and how macroeconomic developments are likely to impact a range of asset classes while wanting to reduce reliance on historic risk/return data.
Russia’s invasion of Ukraine has caused a number of investors to re-evaluate ESG matters – either their own internal policies/processes or those of their external managers. In bfinance’s ‘snap poll’ at the end of Q1 2022, 39% of respondents (418 investors) said that recent geopolitical developments were provoking an adjustment of ESG approach. Several others stated that, while the conflict in Ukraine had not directly affected what they were doing on the ESG front, it reinforced the need for a comprehensive and sophisticated approach.
Active equity managers faced a difficult environment coming into 2022. In Q1, the median global equity manager across all styles lagged the MSCI ACWI by 0.4%. Less than half of this manager universe (42%) managed to eke out alpha during the quarter
In Q1 2022, US IG credit managers were generally successful in delivering alpha: 69% of active IG managers outperformed their benchmarks with a median outperformance of 15bps during the quarter. Managers in Europe experienced greater challenges, however, with only 30% of active IG managers outperforming the Euro IG credit market. Some were caught out by the sudden (and sharp) rate rise by the European Central Bank, and overweight positions in companies with direct or indirect Eastern European exposure, which was extremely detrimental in Q1.
In High Yield bonds, active managers were much more successful: 80% of the peer group outperformed the market, both in the US and in Europe, and in EM debt, 73% of active hard currency managers and 70% of active local currency managers outperformed their respective benchmarks during Q1 2022.
Across the Diversifying Strategies manager composites, only one strategy shone brightly in Q1 2022: Macro & Trading. The prevailing market environment proved challenging for most liquid alternative strategies and managers worked hard at limiting losses (as opposed to generating gains).
For CTA and Macro strategies, however, the environment proved near-perfect for unconstrained directional views to generate some of the best quarterly returns we’ve seen in more than a decade. As strong proponents of long-term strategic allocations, we often dissuade clients from trying to ‘time the timers’ and encourage them to prepare well instead for periods such as this—when strategic exposures to macro strategies can make a material difference to portfolio returns.
Malcolm Hunt, Head of Client Consulting at bfinance, said: “The data in our latest quarterly report shows investors adapting to major macroeconomic shifts and innovating in areas such as ESG/impact. Leveraged loans, EM debt, high yield bonds and real estate have all been attracting more manager search activity than in the previous year—with demand remaining strong into mid-year—while sentiment around hedge funds remains very positive after a strong run of performance through the pandemic period.”