The global pandemic and resulting global economic fallout was by and large in-discriminatory when it came to financial markets, and therefore caused a comprehensive shock to global economies. Institutional and retail investors alike suffered from the economic shutdowns and resulting market sell-offs, followed by the more recently market rallies. Although we are now in the throws of second-wave outbreaks, and with many believing there is much more economic turmoil to be seen, investors are now seeking guidance on how and where to proceed, albeit with much caution.
For a view on investments trends as we approach Q4 2020, we partnered with Hexagone Groupe, a French investment advisor that provides investments solutions across all asset classes for both institutional and retail investors. In the article below, Christophe Aubert and Thomas Albert, both partners at Hexagone Groupe, have outlined the investment patterns that are currently taking shape in the market.
Partners, Hexagone Groupe
Institutional investors: Changes affecting investors’ relationship with their portfolio, rather than the selection of underlying products
Projecting into the future, a challenge for institutional investors
On the institutional side, our observations have shown that the investment momentum differs greatly from one institution to another. While some have put a stop to their investment programmes, either due to the impact of the crisis on their business or to a lack of visibility, most institutional investors deployed investment strategies similar to those implemented at the beginning of the year once lockdown restrictions were lifted. The uncertainty caused by the current health and economic situation is preventing investors from projecting into the future, or from developing long-term strategies that take into account the impact of the crisis.
This uncertainty has been further heightened by the billions made available by central banks, which are effectively “putting the market to sleep”. It is therefore difficult to measure the true extent of the recession. Due to the lack of sufficient hindsight for analysing the situation, investors are having great trouble projecting into the future and returning to the strategies “that worked before the crisis”.
The first lessons to be learnt
This period has nevertheless taught us the following:
- While it seems almost certain that central banks will keep their interest rates durably low, low-risk assets across the board are now generating yields close to zero.
- As far as financial products are concerned, institutional investors have continued to focus their attention on non-listed and real estate assets.
- The share of unlisted investments has actually increased in recent months across French institutional portfolios. However, such investments remain rather modest in portfolios compared to bonds or large cap equities (notably due to the risks associated with these instruments: weaker financial strength, liquidity constraints on small and mid-caps, higher risk of fraud…).
- Successive crises (Covid included) have tended to accelerate short-term approaches on this segment, generating strong pressure to deliver performance.
- For investors, real estate, whether physical or in trust format, invariably remains a safe-haven investment in times of crisis.
- Sector allocation has staged a major comeback. Our observations have shown a considerable loss of interest in industries heavily impacted by Covid (hotels, restaurants…) in favour of tech investments, often at excessively high prices.
Financial advisors have a key role to play in seeking alternatives to this ‘herd behaviour’ and encouraging investors to look at less obvious and less costly solutions, such as securitisation, for instance.
A heightened need for transparency
One of the main changes accentuated by the Covid crisis has been a heightened focus on transparency from institutional investors and a dislike for overly complex financial products. More than ever, institutions want to be able to understand their portfolios and measure the risks they carry. In response to this growing need, our teams have created a tailor-made “look-through’ tool which provides information on individual portfolio positions and ensures the data is homogenous, in order to display precise allocation breakdowns. This tool, designed to meet the needs of all European investors, can also calculate the extra-financial impacts of the invested assets.
Retail investors are keen to maintain their purchasing power
The on-going coronavirus pandemic has had two key impacts for retail investors:
Preserving purchasing power and “zero risk”
For retail investors, the first change prompted by the crisis has been a desire to preserve their purchasing power. The threat of an economic crisis has fuelled risk aversion among investors – and while some still appear ready to invest in risk assets, most err on the side of caution. However, it is interesting to note that the concept of ‘preserving purchasing power’ carries very different meanings from one investor to the other. For some, this will imply keeping above inflation levels, while others will demand a set percentage (generally, a yield that will enable them to live off the capital interest).
Advisors will need to adopt an educational approach with their retail investors: “zero risk” products that deliver yields enabling an investor to live off the capital interest simply no longer exist. Investors tend to lose money on guaranteed zero-risk products (sovereign bonds, for example). For this very reason, real estate – both physical or as a REIT – remains a safe-haven from a retail investor’s point of view.
From environmental and societal awareness to thematic funds
The crisis has also raised awareness on the importance of ESG issues. Based on our observations, private investors are increasingly expressing specific requests for thematic funds, covering social (care of the elderly in particular), but also education and renewable energy related issues. On a more original note, in a ‘back to essentials’ spirit, retail investors are demonstrating their appetite for products such as farmlands or standing forests.
A balance to be found
The task will be to strike an investment balance that is suited to the individual preferences and goals of each investor; this will involve a mix of physical real estate, REITs and thematic funds.
