Professional fund selectors expect to battle a difficult market landscape this year as inflation hits 30-year highs, central banks withdraw stimulus and client expectations exceed realistic returns, according to survey findings published today by Natixis IM.
Natixis IM surveyed 436 fund selectors at firms managing $12.6 trillion in total client assets, from private banks, wealth managers, funds of funds, family offices and brokers around the world. When asked about the global economy, half of fund selectors say they are worried about supply chain disruptions, while 45% ranked less supportive central bank policy as a top economic risk. Recent disruptions from the Covid-19 Omicron variant, such as frontline labour shortages, prompted 40% of fund selectors to rank Covid variants as the other top economic concern this year.
The analysis showed, seven in ten fund selectors globally see interest rates as a key portfolio risk in 2022, followed by 68% who ranked inflation as a top risk. Valuations are also cited as a top portfolio concern, with 84% of fund selectors believing that low rates have distorted valuations.
Despite the challenging outlook, long-term return assumptions are on the rise, up from 7.1% in their 2021 outlook to 7.8% in 2022. Even still, selectors may be challenged to meet the outsized expectations of clients, who in a separate survey* anticipated long-term returns of 14.5% above inflation.
Against this backdrop, fund selectors say they are positioning themselves to make tactical moves, rather than dramatic changes in 2022, to balance the risk / return potential of portfolios.
Private assets prominent in asset class calls
With interest rates at near all-time lows, fund selectors are looking to private markets in the search for yield replacements. The survey results show increasing allocations to income-generating investments in private markets across infrastructure (45%), private debt (35%), real estate (30%).
Private equity also factors into alternative allocations, as nine out of 10 who own the asset class will pursue the potential for enhanced returns with lower correlations to traditional equities by maintaining (47%) or increasing (45%) to these investments.
Meanwhile, fixed-income strategies will come under greater scrutiny and 39% of fund selectors say they expect to decrease allocations to rate-sensitive government and sovereign bonds.
However, 50% of those who invest in green bonds say they are looking to increase allocations in 2022, as the shift to ESG-focused strategies continues grow.
Reopening trade factors in sector calls
At a sector level, energy is touted to outperform this year by 54% of fund selectors, along with financials (51%) and healthcare (47%). The overall view on tech is also positive with 43% anticipating the sector to outperform. Where some may worry about a potential break up for big tech, 65% believe growth for the sector will continue in 2022.
Managing client expectations
Model portfolios are emerging as fundamental for firms as they look to manage client risk exposure and expectations. 82% believe models allow them to provide clients with a more consistent investment experience and 85% say models provide a streamlined approach. Four in five respondents say their firm already offers model portfolios.
Further to this, models enhance efficiency as seven out of ten say they provide an extra level of due diligence. This can allow advisors to spend more time focused on helping their clients address long-term goals.
Fund selectors say there is also a need for specialty models focused on thematic investments (38%), alternative investments (34%), tax-managed (26%), and income (25%) portfolios, implying that models provide a consistent and efficient way of addressing a wide range of key client needs
ESG is integral to sound investing
Seven in ten saying that ESG is integral to sound investing and 76% of fund selectors say their firms are already actively investing for ESG impact (37%) or thinking about it (39%). Over half (54%) of respondents think the desire to influence social and environment issues is driving the demand for ESG investments, and more than six in ten (63%) go so far as to say there is alpha to be found in ESG.