Study shows active management in demand as passive's popularity is considered a systemic risk
The current market conditions resulting from the coronavirus pandemic may be more severe than any of us could have known, but fund managers were ahead of the curve.
That’s because most were prepared for a global market slowdown months before the COVID-19 outbreak according to new survey results from Natixis Investment Managers.
The poll of more than 400 fund buyers across North America, Latin America, Europe, Asia, and the Middle East, was conducted in the fourth quarter of 2019.
It found that 79% were expecting greater volatility in the equity markets and 72% expected the same in the bonds markets.
While the coronavirus outbreak has caused more instability than could have been predicted, the fund managers were already prepared to be risk-averse in 2020.
Almost half of respondents said they would be pulling back from US equities and almost three quarters said they would accept underperforming their peers in return for greater downside protection.
“Professional fund buyers are enduring unprecedented market conditions as geopolitical risk continues to remains on the horizon,” said 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.”
Active vs. passive
Active managers are not only in demand but can attract a premium as fund managers indicated they would pay higher fees for potential overperformance.
But 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.
Alternatives, ESG rising
The survey also revealed that private assets are in focus with 49% of respondents saying they will play a more prominent role in their portfolio strategy.
More than 8 in 10 fund managers said that the low interest rate environment would mean a shift towards alternatives including infrastructure, real estate, and private debt.
ESG factors are also increasingly important as a risk factor that active managers can incorporate into their decision making.
Asked why, 22% of fund buyers said to minimize headline risk, 21% said to generate high risk-adjusted returns and 19% said to improve diversification.
The survey revealed that 62% of fund buyers are feeling increasing demand from clients to align their strategies with investor values.
Given that the pandemic was not yet known about, the fund managers were already expecting overperformance in information technology, healthcare, and financial services.
“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,” said 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 full report is available at: www.im.natixis.com/us/research/2019-professional-fund-buyer-survey