The vast majority of investors (82 per cent) are satisfied with how their portfolios performed in the first half of 2020, despite some weak results in strategies such as emerging market debt and smart beta, according to a new study of 368 investors with combined assets of approximately US$11 trillion.
Following the quickest equity market drawdown in history in the first quarter of 2020, and with government deficits rocketing to new highs, the latest bfinance asset owner survey, carried out in June, sought to ascertain what pension funds, insurers, endowments, foundations and other investors have learned from 2020 so far, how they have handled the obstacles and opportunities created by the crisis, and their current portfolio expectations.
The results paint a cautiously positive picture. Most appear happy with how their portfolios have performed, although 50 per cent of those with explicit liabilities (including 63 per cent of relevant pension funds) say that their asset-liability modelling position has worsened this year. The data indicates an investor community seeking both to take advantage of opportunities presented by the crisis as well as grappling with the obstacles it presents.
With 82 per cent of investors reporting satisfaction with overall portfolio performance in the first half of 2020, it is not surprising to see that most are staying the course with the essentials of their portfolio strategy. In fact, only 25 per cent indicated that they’re changing their strategic asset allocation during the course of this year, and those changes largely appear to be modest or represent a continuation of pre-existing developments, such as a shift in favour of private market investments.
Active over passive management also received strong affirmation in most asset classes, although there are notable weak spots: 53 per cent of emerging market debt investors are dissatisfied with the performance of their strategies in this space relative to the appropriate benchmark(s), as are 48 per cent of hedge fund investors, 64 per cent of alternative risk premia investors and 45 per cent of smart beta investors.
Investors with in-house asset management teams for at least a part of their portfolios appeared a little happier with results in the relevant asset classes than their peers using solely external managers, although the difference was not statistically significant (and one would normally expect positive feedback for in-house strategies given the internal strategic commitment to those teams). Most investors use external managers for the majority of their strategies, and 19 per cent of investors are replacing managers based on recent results with substantially more (35 per cent) likely to do so.
The pandemic crisis also highlighted a number of lessons to be learned on the risk management side. Although the vast majority of investors are satisfied with the performance of their risk management processes, more than a third (35 per cent) are making changes in this area, with key areas of focus including liquidity management, handling risk factor exposures, reporting frequency and manager transparency.
Illiquid asset classes scored relatively high levels of satisfaction, albeit with considerable uncertainty given the opacity on true portfolio valuations. While two thirds of the relevant investors are “happy to use the valuation estimates provided by [their] usual channels,” 24 per cent of investors use a public-markets equivalent for modelling the potential valuation changes in their portfolios and 10 per cent are marking down estimated valuations more severely than their asset managers.
Around half of investors involved in this research reported that they are currently taking a tactical view on risk asset exposures. Those that are doing so are split three-to-two in favour of underweighting risk assets versus overweighting them. North American investors are somewhat more likely to be overweight in risk assets and substantially less likely to be underweight in risk assets than the international average.
One third of investors have already invested in distressed or opportunistic strategies that explicitly seek to benefit from the coronavirus fallout, while a further 22 per cent who have not yet done so are interested in pursuing such opportunities in the coming months. Meanwhile, only 13 per cent say that the inability to travel and do face-to-face meetings or on-site visits poses a “major obstacle” to selecting new mangers and investments, while 31 per cent say it presents “no obstacle.”
The bfinance survey suggests that, at a high level, the portfolio changes anticipated through 2020 represent a continuation of the trends of the pre-coronavirus period: more exposure to private markets; shifting exposure away from risk assets like public equities. Yet there are some differences, including a swing away from fixed income (23 per cent of investors reducing exposure vs. 12 per cent increasing), most notably affecting sovereign debt exposure.
There is no doubt that the first half of 2020 has been extremely challenging (both personally and professionally) for investors of all types and undoubtedly there is more upheaval in store as the true nature of the economic impact of the coronavirus becomes clearer. It is reassuring to see investors’ satisfied with how their portfolios are delivering, especially given the substantial shifts in the economic climate in the decade after the global financial crisis. While such periods are uncomfortable, they are also crucially informative for investors seeking to better understand the diversification and durability of their portfolios, the discipline and skill of asset managers and the vulnerabilities in their risk management regimes.
Les Marton is the senior director of client consulting at bfinance Canada. These views are those of the author and not necessarily those of the Canadian Investment Review.