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New bfinance research reveals investor sentiment during Covid-19 crisis

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bfinance has conducted a new survey of asset owners to ascertain how investors are reacting to the current COVID -19 crisis, and particularly whether they were satisfied with how strategies that may have provided diversification against equity downturns were delivering so far. The poll received responses from 260 investors in 28 countries, with total assets estimated at well over USD2.5 trillion. Among the respondents 49 per cent are from pension funds, 15 per cent from insurers, 13 per cent endowments or foundations and 6 per cent family offices. 

Asset classes that should ideally provide diversification against equity risk, such as investment grade credit and hedge funds, are delivering mixed results for investors depending on the strategies and asset managers used. 

Three in five investors using investment grade credit are either “somewhat” or “very” satisfied with its performance during the downturn, with 35 per cent “not satisfied” and European investors distinctly less happy than US counterparts. 

Among the 46 per cent of investors using multi asset strategies, 57 per cent are either “somewhat” or “very” satisfied (7 per cent “very satisfied”) with their performance through the crisis so far, while 35 per cent are “not satisfied.” For hedge fund investors, 46 per cent are “somewhat” or “very” satisfied” while 38 per cent are “not satisfied.” 

Among the 55 per cent of respondents who had some explicit equity downside protection (hedging) in place prior to the crash, the majority (77 per cent) are either “very” or “somewhat” satisfied with how those hedges have performed. That being said, nearly a quarter are “not satisfied.” Depending on the implementation approach used, hedges could have been either the golden ticket or the false hope of Q1 2020. 

Survey respondents are 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. In addition, investors appear broadly happy with the amount they had allocated to private market strategies, despite some potential portfolio management challenges arising from liquidity constraints: 84 per cent of investor respondents 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. 

Over the last three weeks, 11 per cent of investors have made “significant dynamic or tactical changes” to portfolios, with a third making “minor dynamic/tactical adjustments.” Most are rebalancing to prior weights, or trying to: “a solid, rules-based rebalancing mechanism is key,” says one investor respondent. Yet it is far from straightforward: a significant minority (27 per cent) report that they are wanting to rebalance to the usual asset allocation but finding that “rebalancing is challenging.” 

As market liquidity seizes up, liquidity risk is the dominant concern, and downside risk a close second, for investors over the coming weeks. Although bfinance has noted differences between groups (e.g. pension fund versus insurer) and between individuals of each group, immediate solvency and funding issues are somewhat less of a priority, which may well suggest an expectation that the worst of the decline may be relatively short-lived. 

Optimists and pessimists are balanced in almost equal measure when it comes to expectations for the “most likely outcome” from an economic standpoint. In total, 31 per cent of the group lean more towards the “prolonged recession” camp, while 32 per cent sit on the “faster recovery” side of the fence. 

Kathryn Saklatvala, Head of Investment Content, bfinance, says: “Although markets and performance results are changing week by week, it is fascinating to get an early look at how so many asset owners are initially reacting to what’s happening within 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. We expect considerable scrutiny of manager selection, strategy selection and asset allocation as the dust settles.” 

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