Diversifying strategies has failed to pay off for a number of investors, with a survey finding more than a third using investment grade credit alongside 40 per cent of hedge fund managers are dissatisfied with their performance during the coronavirus downturn.
bfinance conducted the study, assessing the sentiment of 260 investors across 28 countries during the COVD-19 crisis.
Half (49 per cent) of the respondents were pension funds, 15 per cent were insurers, 13 per cent were endowments or foundations and 6 per cent were family offices, holding an estimate collective of more than $2.5 trillion in assets under management.
Asset classes that should provide diversification against equity risk such as investment grade credit and hedge funds were found to deliver mixed results depending on the strategies and asset managers used.
Three in five investors using investment grade credit were either “somewhat” or “very” satisfied with its performance during the downturn, while 35 per cent were “not satisfied”. European investors were reported to be distinctly less happy than US counterparts.
Among the 46 per cent of investors using multi-asset strategies, 57 per cent were either “somewhat” or “very” satisfied (7 per cent being “very satisfied”) with their performance during the crisis so far, however 35 per cent were “not satisfied”.
For hedge fund investors, 46 per cent were “somewhat” or “very satisfied” while 38 per cent were not satisfied.
Among the 55 per cent of respondents who had some explicit equity downside protection hedging in place, the majority (77 per cent) were either “very” or “somewhat” satisfied with how the hedges had performed.
However, bfinance noted, close to a quarter were not satisfied – calling hedges either the “golden ticket or the false hope” of the first quarter for the year.
Investors happy with illiquid strategies
Survey respondents were reported to be generally satisfied with the performance of their illiquid strategies – an area that has seen a substantial increase in average allocations during the last decade. Yet their performance remains a major “known unknown” in investor portfolios.
Further, investors appear broadly happy with the amount they had allocated to private market strategies, despite some potential portfolio management challenges arising from liquidity constraints. Among the reported 84 per cent of investor respondents that use private markets the vast majority are satisfied with their allocations to this area; those dissatisfied with allocations largely say they “should have had more” in illiquid strategies.
Kathryn Saklatvala, head of investment content at bfinance said although markets and performance results are changing rapidly, she finds it fascinating to get an early look at how asset owners are initially reacting to what’s happening in their portfolios.
“While strategies that are theoretically intended to provide some diversification are performing as planned for many, a very substantial minority have been disappointed in the results so far in areas such as investment grade credit, hedge funds and multi-asset,” Ms Saklatvala said.
“We expect considerable scrutiny of manager selection, strategy selection and asset allocation as the dust settles.”
During the last three weeks, 11 per cent of investors were said to have made “significant dynamic or tactical changes” to portfolios, with a third making “minor dynamic/tactical adjustments.”
Most were rebalancing to prior weights, or trying to, with one investor saying a “solid, rules-based rebalancing mechanism is key.”
bfinance noted a significant minority (27 per cent) are wanting to rebalance to the usual asset allocation but have found that “rebalancing is challenging,” as market liquidity seizes up. Liquidity risk has become a dominant concern, with downside risk following as a close second over the coming weeks.
bfinance said there were differences between investors, but immediate insolvency and funding issues were generally less of a priority, suggesting an expectation that the worst of the decline may be relatively short-lived.
Around 31 per cent of investors leaned towards a “prolonged recession” camp, while 32 per cent sit on the “faster recovery” side of the fence.
Sarah Simpkins is a journalist at Momentum Media, reporting primarily on banking, financial services and wealth.
Prior to joining the team in 2018, Sarah worked in trade media and produced stories for a current affairs program on community radio.
You can contact her on [email protected].
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