Investors go ‘back to basics’ with allocations as confidence ticks up in Q2

Emerging market equities and debt managers delivered strongest returns


Appetite for risk improved in Q2 as market confidence ticked up among investors, according to Bfinance’s Manager Intelligence and Market Trends report for Q2 2023.

Despite improving over the period, allocations to risk assets are still under the 10-year average among multi-asset managers.

The report utilises new manager search data to gauge market trends, rather than official asset allocation percentages which are updated on a periodic basis.

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Managers are increasingly interested in fixed income, with searches for the asset class making up 18% of new queries, compared to 11% in Q1. The firm said that within fixed income portfolios, they have witnessed a movement towards investment-grade corporate bonds due to higher yields.

However, private markets continue to be targeted as strategies in the sector made up 53% of all new manager searches, though this was down from 58% in the first three months of the year.

Bfinance noted that growth-oriented equity strategies and emerging market equity and debt managers all delivered strong results over the quarter, while value portfolios suffered.

Back to Basics

In Q2, the consultancy firm commented there was a desire among investors to go ‘back to basics’ in their portfolios.

The report outlined that across the board, investors are focusing on resilience, risk and re-evaluating the core of their portfolio, or in other words, “getting the basics right”.

“In equities, we see investors concentrating on broad global developed market mandates and quality styles, with high demand for assets that exhibit strong fundamentals, resilient earnings growth, sustainable competitive advantages and pricing power.”

Institutional investors are also safeguarding portfolios against over-diversification.

“Over-diversification is a real risk: it can erode outperformance, lead to convergence to the benchmark and increase investments and governance costs,” the report added.

“In a bid to limit potential over-diversification, we see investors reconsidering the number and type of asset managers in a given asset class. There a various ways of doing this.

“For example, in equities, one pragmatic approach is to focus on a set of style ‘building blocks’ that can complement each other, exploiting the negative excess return correlations between investment styles. Different styles benefit from different macroeconomic and market conditions with results visible over different time horizons.

“The manager roster can be simplified around these building blocks; subsequently it is important to conduct frequent reviews to ensure that managers adhere to their intended styles and that the portfolio continues to be exposed to selected factors in a balanced way.”

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