One thing that’s coming through clearly from my conversations with clients over the past two months is that they are worried about future returns from markets.
At a recent investor summit for a major client, the message could not have been clearer: volatility is back and the outlook is less certain than 2017. While investors – and BlackRock – remain relatively positive over the state of the global economy over the next 12 months, the big question starting to arise is: what after that?
This client and others have told me they want ‘captains’ to steer them through these markets; to react and adapt to rapidly-changing conditions. They do not believe mono-directional, buy-and-hold solutions are as suitable for the next two years as they might have been during the past market rally – and that portfolios will need to be adjusted more often.
Client opinions and statements of intent are extremely useful, but I still like to look at data to identify emerging trends. Asset flows are painting a clear picture of strong investor momentum towards alpha-seeking strategies – particularly in fixed income. More than half of 2017 flows into alpha-seeking strategies went into bonds, while alpha-seeking equity – widely declared deceased – also staged a notable recovery last year.
A fundamental shift?
So, what now? Why do we see BlackRock institutional clients increasing their allocations to active management mandates? Why are clients using terms such as ‘steer’ and ‘navigate’ when talking about medium-term market conditions? There have been several attempts to call the end of the market rally since 2009. Greece. Taper tantrums. The oil and commodity sell-off in 2014-15. Election shocks. Concerns about China’s swelling debt load. Stretched equity valuations. The Federal Reserve normalising policy. Yet none proved to be a trigger. So, is anything different now?
From my perspective, none of the current signals – US 10-year Treasury yields breaking 3 per cent; broad money trends; slowing economic momentum – is a particular cause for alarm. But perhaps we are coming to the end of this long phase characterised by alternated ‘risk-on, risk-off’ periods . Maybe there will be more reward for bottom-up, fundamental stock picking, illiquidity premia and specialist markets.
How can we adapt to change?
Investments are not binary. There are always nuances and different ways to tackle an investment challenge. As much as our clients are telling us they need captains, we reply that they require a toolkit which harnesses the power of data and modern technology and embraces a holistic set of portfolio construction capabilities.
Many investment objectives need a combination of investment strategies, and the conversation will increasingly turn to how best to blend a portfolio. Success in the future will involve looking across the investment spectrum to identify where indexing strategies are most appropriate, where factors can help drive additional returns and where an alpha-seeking approach is most apt. In fixed income, for example, yield curve strategies, duration management and access to markets can be a major differentiator for an alpha-seeking manager.
As investors increasingly focus on the value for money they are receiving, the desired outcome will need tighter definition and monitoring – to continuously align portfolios towards the most cost-effective way to achieve it. This will require more powerful tools and analytics, to enable investors to have a deeper understanding of how the selected products interact with one another. Let’s remember that a portfolio composed of the best managers isn’t necessarily the best possible portfolio.
Michael Gruener is head of EMEA Retail at BlackRock
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