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Bfinance’s Saklatvala comments on growth of diversification against backdrop of declining equities and bonds

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Commenting on its Risk Aversion Index, Kathryn Saklatvala, Head of Investment Content at bfinance says that continuing declines in equity and bond markets have put diversification under a spotlight as the classic 60:40 model portfolio loses a fifth of its value year-to-date. 

Investors must not only re-evaluate strategy but do so in the context of secular macroeconomic shifts that have created an unprecedented investment environment, she says.

The bfinance Risk Aversion Index continues to creep upwards, the firm says, while multi-asset managers cut equity allocations to a 10-year low. The average allocation to equities among multi-asset managers was around 28 per cent at the end of Q3.

Demand for private market strategies has remained extremely strong: even though the effects of macroeconomic headwinds are now becoming more apparent, investors anticipate strong upcoming vintages, Saklatvala says. 

The illiquid asset classes—private equity, infrastructure, real estate and particularly private debt—represent an increasing proportion of new manager searches from bfinance clients, the firm reports.

‘Divergent’ alternative investment strategies such as global macro hedge funds and commodity trading advisers (CTAs) continue to deliver strong performance in 2022, providing resilience amid bond and equity market declines. 

“We are yet to see a significant uptick in manager searches in this space, but expect to see robust appetite as investors consider their overall portfolio strategy over the coming years. The 2022 performance figures may also encourage a revival in demand for Alternative Risk Premia strategies” she says.

“Within equities and fixed income we see strong demand for emerging market strategies: nearly half of all new manager searches in fixed income for the twelve months to September 30th have targeted emerging market debt, up from 22 per cent.”

In conclusion, the firm notes that investors are paying extremely close attention to active manager performance in a period of market difficulty. “Within equities, managers with ‘growth’ styles enjoyed a stronger Q3 but are still well behind year-to-date, while EM equity managers outperformed the index—often driven by under-exposure to China.”

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