New bfinance asset owner survey: 82% satisfied with performance during pandemic, investors see opportunities, not obstacles


Kathryn Saklatvala

Following the quickest equity market drawdown in history in Q1 2020 and with government deficits skyrocketing to formerly inconceivable levels, bfinance has conducted its mid-year Asset Owner Survey to ascertain what investors have learned from 2020 so far, how they have handled the obstacles and opportunities created by the crisis, and their current expectations.

bfinance received responses from 368 investors, just over half of which are pension funds, with combined assets of approximately US$11 trillion. The results presented a picture of cautious optimism with the vast majority (82%) being satisfied with how their portfolios have performed and widespread positive feedback for active management results, although 50% of those with explicit liabilities (including 63% of relevant pension funds) say that their ALM position has worsened this year. More than a third are making changes to risk management as a result of COVID-19 lessons, while 24% are changing their Strategic Asset Allocation in 2020. These are the key findings of the latest asset owners survey from bfinance “Managing through uncertainty”.

2020 so far

Although the vast majority of investors are satisfied with the performance of their risk management processes, bfinance found that 35% are making changes here. Similarly, 82% are satisfied with overall portfolio performance, with just 25% changing their Strategic Asset Allocation in 2020, and most are happy with the results of actively managed strategies across the majority of asset classes. That being said, there are notable problem areas: 53% of Emerging Market Debt investors, 48% of Hedge Fund investors and 64% of Alternative Risk Premia investors are dissatisfied with the performance of their asset managers (whether external or in-house) in those strategies.

bfinance noted slightly higher levels of satisfaction within asset classes from investors where only internal teams were used to manage the asset class versus cases where investment was conducted solely through external managers, although there is no evidence that the former outperformed the latter. Most investors use external managers for the majority of strategies, and 19% of investors are axing managers based on recent results with substantially more (35%) likely to do so.

Illiquid asset classes scored relatively high levels of satisfaction, albeit with considerable uncertainty given the opacity on true portfolio valuations. While two thirds of the relevant investors are “happy to use the valuation estimates provided by [their] usual channels”, 24% of investors use a Public Markets Equivalent for modelling the potential valuation changes in their portfolios and 10% are marking down estimated valuations more severely than their asset managers.

COVID-19 obstacles and opportunities

bfinance found 33% of investors have already invested in distressed or opportunistic strategies that explicitly seek to benefit from the COVID-19 fallout, while a further 22% who have not yet done so are interested in pursuing such opportunities in the coming months. Only 13% of investors say that the inability to travel and do face-to-face meetings or on-site visits poses a “major obstacle” to selecting new mangers and investments, while 31% say it presents “no obstacle”.

Among the half of investors who are taking a tactical view on risk asset exposures right now, respondents are split 3:2 in favour of underweighting risk assets versus overweighting them. North American investors are somewhat more likely to be overweight in risk assets and substantially less likely to be underweight in risk assets than the international average (23% vs 19% and 21% vs 29%).

Pre-COVID trends broadly continue, except for fixed income

The pre-COVID three-year period largely saw a continuation of trends that were initiated in the post-GFC window phase, such as a shift towards illiquid strategies, broader geographical diversification (including emerging markets), and the shift towards private market strategies. To a lesser extent, the period had also featured a shift away from equities, but no definitive swing in fixed income exposure.

bfinance’s survey suggests that, at a high level, the portfolio changes anticipated through 2020 represent a continuation of the above shifts: more exposure to private markets; lower exposure to public equities. Yet there are some differences, including a swing away from fixed income (23% of investors reducing exposure vs. 12% increasing), most notably a reduction in sovereign debt exposure.

Kathryn Saklatvala, Head of Investment Content for bfinance, comments: “The first half of 2020 has been extremely challenging for investors of all types, and undoubtedly there is more volatility and upheaval in store as the true nature of the economic impact of COVID-19 becomes clearer.

“While such periods are uncomfortable, they are also crucially informative for investors seeking to understand the diversification and resilience of portfolios, the discipline and skill of asset managers, and the weak-points in risk management capabilities or processes.

“It is great to see the majority of investors reporting satisfaction with overall portfolio performance, risk management and active management results across the majority of asset classes, although there are important changes underway on all fronts.”

Frithjof van Zyp, Australian Senior Director for bfinance, added: “We were pleased to receive responses from 34 Australian investors in the asset owner survey, the majority of whom were superannuation funds, as well as some insurance companies and endowment trusts.

“It’s interesting to note that Australia is broadly falling in line with global investment trends, particularly in terms of ESG, where 82% of Australian respondents indicated that ESG considerations are either very important or moderately important to setting investment strategy and implementation, compared to 78% of global respondents.

“There were some interesting differences when comparing the results of Australian respondents against their Global peers. For example, 41% of superfund respondents in Australia have been dissatisfied with the performance of their direct property portfolios relative to stated benchmarks and targets, whereas this figure is noticeably lower for global respondents with just 23% being quite/very dissatisfied.

“As far as positioning portfolios going forward, 11% of Australian respondents indicated being overweight risk assets, while 46% are not taking a tactical view of risk assets (i.e. rebalanced to usual weights), and 43% are underweight risk assets. Comparing these results to the Global investor responses, Australian investors seem to be slightly more cautious as the Global figures are 19% overweight risk assets, 52% not taking a tactical view, and only 29% are underweight risk assets.

“It’s also interesting to note that 37% of Superfunds indicated having either already changed their strategic/long-term asset allocation since the onset of the pandemic, or expecting to do so before the end of 2020. The response from pension funds globally sat lower at just 25%. The sudden introduction of the super early release scheme will have likely further contributed to Superfunds having to rethink their strategic asset allocations.”

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