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Professional fund buyers prepared for global market slowdown, says Natixis survey

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Professional fund buyers globally anticipated increased market volatility in 2020, taking a more defensive approach to portfolio positioning, according to a survey by Natixis Investment Managers. The survey of more than 400 fund buyers – responsible for selecting funds included on private bank, insurance, fund-of-funds and other retail platforms – which was conducted in Q4 2019, found that four-fifths (79 per cent) expected greater equity volatility and 72 per cent expected higher volatility in the bond markets.

While the historic levels of volatility experienced in markets across the globe since February 2020 were unpredictable, fund buyers had already signaled they would be taking a risk-averse approach to fund selection during 2020. Almost half (44 per cent) expected to diversify away from US equities, while 73 per cent said they would be willing to underperform their peers in exchange for greater downside protection. Whether it was concern about stratospheric stock valuations, questions about the viability of a sustained low interest rate environment, or the lingering effects of geopolitical uncertainty, professional fund buyers expected the rally was unlikely to continue in 2020.

“Professional fund buyers are enduring unprecedented market conditions as geopolitical risk continues to remains on the horizon,” says David Giunta, CEO for the US at Natixis Investment Managers. “Despite these circumstances, professional fund buyers are working to protect their clients – both from market losses and from individuals’ reactions to them – by crafting portfolios that are durable and diversified enough to withstand extreme market volatility.”

As a result, fund buyers are looking to active managers to help navigate the greater sector dispersion in markets, with three-quarters of fund buyers (75 per cent) willing to pay higher fees for potential outperformance. Fund buyers also noted the popularity of passive investments as a source of systemic risk and volatility as better-performing securities receive larger weights. Buyers flagged concerns around the potential for large losses in the event of a downturn.

Fund buyers generally think the benefits are worth the tradeoffs, particularly in the case of private investments. Almost half (49 per cent) say private assets will play a more prominent role in their portfolio strategy going forward.

The survey also found that eight in ten buyers (82 per cent) felt that the ongoing environment of low yielding bonds will trigger a shift toward alternatives. That hunt for yield likely explains the interest in income-related alternative assets such as infrastructure, real estate and private debt, with half (49 per cent) saying that private assets will play a more prominent role in their portfolio. Clearly, after the volatility experienced in the past few weeks, buyers will have found a new appreciation for strategies that will help produce un-correlated returns and offer greater potential for risk management.

In turbulent markets ESG is also increasingly being recognised as an important risk factor which active managers can account for. When asked the primary reason for incorporating ESG factors into their investment decision making, 22 per cent of fund buyers said to minimise headline risk, 21 per cent said to generate high risk-adjusted returns and 19 per cent said to improve diversification. The survey revealed that 62 per cent of fund buyers are feeling increasing demand from clients to align their strategies with investor values.

Europe has pioneered the implementation of ESG and continues to take the lead, with higher rates of implementation and active ownership, in which investment firms enter into a dialogue with companies around ESG issues, exercising both ownership rights and voice to effect change.

Despite the heightened volatility and short-term disruptions, fund buyers’ long-term return assumptions remain fairly stable, having already built into account the ebbs and flows of market cycles. This year is no exception, and the vast majority of buyers (85 per cent) reported their organisation’s return assumptions as realistically achievable. However, many buyers had anticipated some reversion to the mean after a strong 2019, with 38 per cent more respondents expecting to lower return assumptions than to raise them.

The survey also revealed that buyers’ sector preferences were already reflecting expectations for weak economic growth. Few expected the pro-cyclical materials and industrials sectors to outperform. Instead, buyers were most sanguine about sectors with strong secular growth drivers, expecting outperformance in information technology (44 per cent), healthcare (42 per cent) and financials (32 per cent).

“Professional fund buyers entered 2020 anticipating further market volatility and risk. What event would trigger a fall and when exactly it would occur was entirely unknown,” says Ed Farrington, Executive Vice President of Institutional and Retirement Sales at Natixis Investment Managers. “We are starting to see professional fund buyers return to risk with a continued focus on ESG strategies, well-valued equities and alternative fixed income.”

The Natixis Investment Managers Global Survey of Professional Fund Buyers was conducted by CoreData Research in October and November 2019. The survey included 400 respondents in 23 countries throughout North America, Asia, Latin America, the United Kingdom, Continental Europe and the Middle East.

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