How volatility is affecting fund selectors’ choices

Market volatility is now front and centre for distributors in Asia deciding on funds to recommend or add to their shelves, something that is reflected in an increased focus on risk-managed and income-focused strategies.

So said Matt Shafer, London-based head of global wholesale at Natixis Investment Managers. He was speaking to AsianInvestor ahead of the fund house’s release today of a global survey of 200 fund buyers*, including private banks, insurers and funds of funds.

“We’re seeing more and more [fund buyer] clients in Asia diversifying their equity positions into different strategies that they have not invested so much in [previously],” Shafer said.

They are adding more smart beta products, such as minimum variance strategies, to their platforms or discretionary portfolios, he noted. “That's definitely a trend; you see more and more funds being launched, globally and in Asia.”

Fund buyers globally ranked their top three risks as rising interest rates (55% cited this), volatility spikes (47%) and liquidity (36%). The figures were not broken down by Asia respondents, but Shafer suggested volatility was a particularly major concern in the region.

While there were a few stock market spikes in 2017, it appears to have arrived in earnest during the first quarter of this year, noted the Natixis survey. Since January 1, US equity benchmark the S&P 500 recorded 18 days with market movements up and down of 1% or more. That is a big change from 2017, when this level of volatility was recorded on only eight out of 252 trading days, added Natixis.

Other regions also saw similar moves, with the FTSE 100, Euro Stoxx 50, Nikkei and MSCI Emerging Markets indexes all starting the year with high volatility, said the firm.

FIXED INCOME RETHINK

Meanwhile, with interest rates set to rise in markets such as the US and UK, fund buyers are rethinking fixed-income portfolios, shortening durations and turning more to alternatives to generate income, said the report. 

Many private clients and banks in Asia have been over-exposed to certain types of funds, such as high yield bonds, which have seen a lot of money withdrawn, noted Shafer. Global HY bond funds have suffered net $14.3 billion of outflows in 2018 as of April 19, said Natixis.

Much of that capital is instead going into unconstrained fixed income and uncorrelated strategies such as alternatives, which have done well in previous periods of rising rates, Shafer said. He said such products were a big topic of discussion at conferences that he attended last week in Hong Kong and Singapore hosted by a global private bank.

A particular trend is a big rise in interest in infrastructure investment, both globally and in Asia, noted Shafer. A net 30% of fund buyer respondents globally said they planned to increase allocations to such investments (the figure was obtained by subtracting the percentage who will reduce their exposure from that of those who will raise it).

Emerging-market debt and private debt are also popular globally, with a net 26% and 21% of fund buyers, respectively, looking to raise those allocations. By contrast, government bonds and high yield are out of favour, with a net 25% and 14% planning to cut their allocations to those asset classes.

HIGH RETURN EXPECTATIONS

Despite the very challenging environment, fund buyers remain notably optimistic about returns. They reported an average return target of 8.4%, and 82% of them said this was realistically achievable.

Moreover, return expectations among fund buyers in Asia are still higher than those of their peers elsewhere, noted Shafer, but he could not provide a specific figure. 

According to Natixis IM surveys this year, global institutional investors have a long-term target return of 7.2% and the figure for Asian institutions is 8.1%.

All that said, the increasing focus on risk management and lower-yield, income-based strategies, such as infrastructure, suggests wealthy clients are gradually tempering their expectations. Education by industry professionals is also doing its part, added Shafer.

* Firms from 23 countries were polled, incuding Hong Kong, Japan, Singapore and Taiwan, which between them acounted for 12% of respondents.