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Manager Intelligence and Market Trends November 2019 Contents Quarterly Analysis Manager Intelligence and Market Trends November 2019 Contents 03 At a glance 04 Risk appetite 06 New manager searches 08 Equity 13 Fixed income 19 Diversifying strategies 23 Private markets bfinance is an award-winning specialist consultant that provides investment implementation advice to pension funds and other institutional investors around the globe. Founded in 1999, the London-headquartered firm has conducted engagements for more than 340 clients in 35 countries and now has eight offices in seven countries. Services include manager search and selection, fee analysis, performance monitoring, risk analytics and other portfolio solutions. With customised processes tailored to each individual client, the firm seeks to empower investors with the resources and information to take key decisions. The team is drawn from portfolio management, research, consultancy and academia, combining deep sector-specific expertise with global perspective. This commentary is for institutional investors classified as Professional Clients as per FCA handbook rules COBS 3.5R. It does not constitute investment research, a financial promotion or a recommendation of any instrument, strategy or provider. Contact details Kathryn Saklatvala, Head of Investment Content, [email protected] Geraint Morgan, Director – Portfolio Monitoring, [email protected] 2 | bfinance Manager Intelligence & Market Trends Q4 2019 At a glance... A rocky Q3, underpinned by weak economic New mandates for “multi asset” outstrip new data and ongoing trade war tensions, saw mandates for hedge funds. Yet the real picture the bfinanceRisk Aversion Index shooting is more complex: investors are increasingly back to January 2019 levels. Further monetary pursuing “outcome-oriented” manager easing in the US and Europe calmed the searches, with a clear focus on the desired symptoms of market unrest, but investors objectives but an open mind about strategies remain concerned about the fundamentals. that may fit the bill. New manager searches from bfinance Demand remains strong for investment grade clients illustrate the ongoing emphasis credit. While the US market is outperforming on diversification, withprivate markets Europe through 2019, Europe has provided mandates proving more numerous than equity a more favourable environment for active mandates. In private markets we note a clear managers: 85% of them beat the benchmark shift from debt towards equity, with a decline in Q3. in new searches for corporate private debt. Plenty of active equity managers were caught out in Q3 when the value factor returned to form: global equity managers tracked by bfinance underperformed the MSCI World by 1.2%, although relative performance remains strong over one year (+2%) and three years (+2.9% pa). PERFORMANCE OF PUBLIC MARKETS TO END OF SEPTEMBER 2019 3M 1Y 3Y 15% 10% 5% 0% Performance -5% -10% -15% World Global Global S&P Equity Government Corporate GSCI Bond Bond Source: bfinance/Bloomberg 3 | © November 2019 bfinance. All Rights Reserved. Risk appetite Investors shift into “risk-averse” mode amid weaker macro data and skittish markets Risk appetite barometer, Manager positioning barometer, Q3 vs Q2 Q3 vs Q2 Risk Averse (Scared) Risk Seeking Bearish Bullish Q3 Q2 Source: bfinance (see page 5) 4 | bfinance Manager Intelligence & Market Trends Q4 2019 Risk appetite continued A rocky summer, underpinned by weak economic with the RAI ending the quarter only marginally data and ongoing trade war tensions, saw the above par. bfinance Risk Aversion Index shooting back to January 2019 levels, well over its ten-year average. Multi asset funds retain a “positive” weighting to risk assets, in that equity allocations remain above their Monetary easing somewhat helped to calm stock long-run average, although we have observed a markets through the end of the quarter, along modest (~1%) reduction through Q3 2019. with other indicators of risk aversion such as expectations of corporate default and future volatility, MARKET POSITIONING OF MULTI-ASSET FUNDS 45% Equity Long Run Average Equity Market Exposure 43% 41% 39% 37% 35% 33% 31% Equity Exposure 29% 27% Average Multi-Asset Manager 25% Dec-11 Dec-15 Dec-17 Dec-18 Dec-14 Dec-16 Dec-12 Dec-09 Dec-10 Dec-13 Source: bfinance. This graph shows the current and average exposure to equities held by a range of multi-asset managers. This is based on proprietary analysis performed by bfinance. The managers analysed vary in strategy from macro and GTAA through to bottom-up allocation strategies. THE BFINANCE RISK AVERSION INDEX: 10-YEAR VIEW THE BFINANCE RISK AVERSION INDEX: 1 YEAR VIEW 1.0 1.0 0.9 0.9 0.8 0.8 0.7 0.7 0.6 0.6 0.5 0.5 version Level 0.4 version Level 0.4 A A 0.3 0.3 Risk 0.2 Risk 0.2 0.1 0.1 0.0 0.0 Jul-19 Apr-19 Oct-18 Jan-19 Jun-19 Feb-19 Sep-19 Mar-19 Nov-18 Dec-18 Aug-19 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17 Sep-18 Sep-19 May-19 Source: bfinance/Bloomberg Source: bfinance/Bloomberg The bfinance risk aversion index is a proprietary measure we use to calculate how risk seeking (nearer zero) or risk averse (nearer 1) the market consensus is. It ranges between 0 and 1. The internal algorithms used incorporate indicators of market expectations of future volatility (e.g. implied volatilities in equities and FX), the level of classic safe haven investments (gold) and market expectations of corporate default (e.g. CDX). 5 | © November 2019 bfinance. All Rights Reserved. New manager searches “Alternative” mandates outweigh traditional as investors pursue diversification and income NEW MANAGER SEARCHES, 12M TO SEPTEMBER 30 2019 (BY ASSET CLASS) % of mandates % of assets 45% 40% 39% 40% 35% 35% 30% 30% 26% 25% 25% 19% 20% 20% 16% 15% % of assets % of mandates 15% 10% 10% 5% 5% 0% 0% Equity Fixed Income Private Markets Diversifying Strategies (Real Assets, Private (Hedge Funds, Liquid Debt, Private Equity) Alternatives, Multi Asset & other) Note: these figures only represent projects initiated after October 1st 2018 and do not include pre-existing client engagements that continued during the year. 6 | bfinance Manager Intelligence & Market Trends Q4 2019 New manager searches continued Newly initiated manager searches from bfinance (see Investment Management Fees: Is Competition clients in the twelve months to September Working?). Meanwhile, the average size of equity 30th 2019 illustrate the ongoing emphasis on and fixed income mandates has remained roughly diversification, with pension funds and other asset constant and the typical “diversifying strategy” owners seeking resilience to market shocks, mandate is somewhat smaller due a number of very improved income or a combination of both. The large overlays implemented during the prior year. number of private markets mandates definitively outstripped new mandates for equities – historically Manager selection remains a central service for the dominant segment – in this period. bfinance clients: 82% of the firm’s engagements with investors in this year included handling new Meanwhile the average size of new mandates has mandates in at least one asset class, either as a continued to rise, now sitting at S$143 million versus standalone service or as part of broader support US$110 million in the previous twelve months. including portfolio strategy, risk analytics, fee This has been driven by a significant increase in benchmarking, monitoring, due diligence and the average size of private market searches. It is other investment implementation support. interesting to note, in a related trend, that private market managers have also been raising their fee tiering thresholds in more recent funds – the size of commitment for the investor to qualify for a discount NEW MANAGER SEARCHES (BY INVESTOR LOCATION) Equity Fixed Income Private Markets Diversifying Strategies 45% 40% 35% 30% 25% 20% % of manager searches 15% 10% 5% 0% Asia Europe Middle East North UK Pacific & Africa America Note: these figures only represent projects initiated after October 1st 2018 and do not include pre-existing client engagements that continued during the year. 7 | © November 2019 bfinance. All Rights Reserved. Equity Dip in global searches as regional mandates rise NEW EQUITY MANAGER SEARCHES TO 30 SEPTEMBER 2019, YEAR-ON-YEAR OCT 2017 – SEP 2018 OCT 2018 – SEP 2019 40% 36% 35% 32% 29% 29% 30% 28% 25% 20% 20% 16% 15% 11% 10% 5% 0% Global Emerging Markets Developed Regional Listed Real Assets Equity (GEM, Emerging Equity (US, Europe, (REITS, Listed Asia, China) Japan, Australia) infrastructure) Note: these annual figures only represented projects that were initiated during that year, and do not include pre-existing arrangements that continued during the year. 8 | bfinance Manager Intelligence & Market Trends Q4 2019 Equity continued Investor trends Within global equities, investors continue to While demand for global developed market equity seek resilience and diversification. Defensive strategies remains strong, representing 29% of all characteristics, such as low volatility and quality, equity manager searches for the twelve months to have been in high demand, with strategies such as September 30th 2019, there has been a modest “quality value” being targeted. shift in favour of regional equity mandates including Europe, US and Japan. Among searches for regional developed market equity managers, Europe proved to be the most popular The same shift can also be observed in emerging region, thanks in large part to the skew in client market equities, which represent 32% of new location: 48% of equity mandates were for European mandates: although Global Emerging Markets investors, compared with 40% of mandates handled Strategies (“GEMS”) still dominate, China-specific by bfinance as a whole (see page 7). manager searches make up an increasingly substantial proportion of this activity, with investors Allocators are also continuing to show strong appetite drawn by the exceptionally high performance of for small cap strategies at both global and regional active managers versus the MSCI A-Shares index level: these represent 16% of all equity mandates, (see Sector in Brief: China A-Shares).
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