Frithjof VanZyp
The latest Manager Intelligence and Market Trends report from independent global investment consultancy, bfinance, has found that investors are increasingly looking to improve diversification across regions, styles, and market caps amid market concentration. Investor activity in Q3 2024 reflected a continued emphasis on strategic asset allocation, with fixed income, private debt, and infrastructure proving essential in supporting portfolio resilience.
The report includes data on institutional investors’ asset manager search activity from bfinance’s investor client base across 45 countries.
Investor activity
Investor interest in equity manager searches remains strong, with equity mandates comprising 31% of new manager search activity through September 2024, a significant increase from previous years. In line with this, investors are seeking regional, sectoral, and stylistic diversification to mitigate concentration risk in tech-driven markets.
Private market asset searches have shown some stabilisation. Private debt, particularly direct lending, continues to see robust demand, accounting for 20% of all new mandates. Appetite for illiquid assets remains healthy, with infrastructure and renewables continuing to attract significant inflows.
Fixed income search activity remains steady, comprising 11% of searches, with increased interest in unconventional vehicles such as Sukuk bonds and Collateralised Loan Obligations, reflecting investor demand for more nuanced yield strategies.
While interest in diversifying strategies remains relatively stable, there has been a notable increase in demand for hedge funds, particularly those offering defensive diversification. However, defensive overlay strategies, including currency overlays, are gaining traction as investors manage non-local FX risks in increasingly volatile environments.
Risk snapshot
Risk appetite among asset managers held firm in Q3 2024, even as global macroeconomic conditions exhibited volatility. The bfinance Risk Aversion Index peaked in August, ending the quarter at 0.5 – near the ten-year average and slightly more cautious than in prior quarters. This reflects both sustained
engagement in riskier asset classes and ongoing adaptations to economic signals. With 2024 coming to a close, market participants are challenged with balancing growth-oriented positions against a focus on risk mitigation amid persistent volatility.
Portfolio design trends
Central to discussions in Q3 2024 was the Federal Reserve’s long-awaited rate cut, with other central banks, particularly in Europe, also reducing rates amid slowing growth. While the market response to these cuts was modest, investors are positioning portfolios in anticipation of a gradual decline in interest rates over the coming year. The report indicated that investors are focusing on hedge funds and equity overlays to guard against market downturns and emphasising resilience through strategies offering convexity and market independence.
Equity demand is on the rise, driven by the need for diversification beyond tech-heavy markets, as the S&P 500’s performance was largely led by the “Magnificent Seven” tech stocks. This raises questions about portfolio rebalancing, including factor exposures and geographical allocations.
Fixed income strategies benefit from elevated interest rates, with increased focus on duration and credit risk, while securitised credit is gaining attention amid concerns over leveraged loans and high-yield bonds.
In private markets, investors are broadly positive yet remain cautious, particularly in private equity, where slower distributions are creating liquidity concerns. Direct lending in private debt shows resilience, with returns of 9-11% net of fees, and portfolio designers are considering secondaries and semi-liquid structures to improve liquidity.
Manager performance
Active equity manager searches, which comprised 31% of new mandates, continue as investors reassess their strategic positioning. With the MSCI EM up 8.7% in USD terms, growth equities, particularly within the technology sector, drove returns, posing challenges for active managers as market gains remain concentrated within a narrow selection of stocks.
Fixed income, however, saw strong results across investment-grade portfolios, with US corporate bonds yielding 5.7% and Euro corporate bonds at 3.3% in Q3. High-quality bond performance was particularly noteworthy in emerging market (EM) segments, with EM hard currency debt yielding 6.2% and local currency EM debt returning 9.0% in USD terms, driven by currency appreciation and falling local yields.
Hedge funds led the field in diversification strategies, with convex and market-independent approaches favoured for their defensive attributes. There has also been an uptick in interest in currency overlays and climate-focused segments, including carbon trading, reflecting ongoing sustainability initiatives.
Frithjof van Zyp, Senior Director at bfinance Australia, said: “Throughout 2024, we have seen a noticeable increase in search activity, with strong momentum continuing into Q3. This activity has spanned across both public and private markets, with searches ranging from absolute return fixed income, global equities with tight tracking error due to the YFYS performance test, semi-liquid infrastructure for wealth clients, and convex or divergent liquid alternatives for downside protection.
“Manager fees remain a key consideration for our super fund clients, with close attention being paid to transaction costs to provide a holistic view of total expenses. Additionally, ESG considerations have become a prominent focus within our search parameters, reflecting the advancement of client SRI policies compared to a few years ago.”
Kathryn Saklatvala, Head of Investment Content at bfinance, said: “Active equity managers are navigating a tough environment, with returns falling behind benchmarks in early 2024. This has intensified investor focus on diversification within equity holdings. On the other hand, we’ve seen significant momentum in fixed income and defensive diversification, with hedge funds offering market-independent strategies gaining prominence. ESG and climate-related investments remain high on the agenda for asset owners, even as the broader fundraising landscape moderates.”
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