# Investors reorient portfolios amid macroeconomic challenges
Author:  Pal Sinha, Barnali 
Author URL: https://financedigest.com/author/pal-sinha-barnali
Published: 2022-03-09
Category: INVESTING
Category URL: https://financedigest.com/category/investing
Meta Title: Institutional Investors Seek Resilience in
Meta Description: Discover new data on asset manager searches by bfinance Institutional investors seeking strategies to navigate inflation, interest rates, and geopolitical risks.
URL: https://financedigest.com/investors-reorient-portfolios-amid-macroeconomic-challengeshtml

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_![](https://prod.superblogcdn.com/site_cuid_cm5qst7v3003gwirgwqtxn8i8/images/514-1736815979244-compressed.jpg)_

_By **Kathryn Saklatvala,** Head of Investment Content, bfinance_

**Institutional investors are seeking strategies that will help to provide resilience amid surging inflation, rising interest rates, heightened market volatility and geopolitical upheaval. Meanwhile, the climate risk agenda is still front of mind.**

New data on asset manager searches launched by bfinance clients (pension funds, insurers, endowments and other institutions across more than 40 countries)—discussed in detail below—shows an ongoing decline in the proportion of mandates targeting conventional fixed income strategy types, offset by a surge in searches for (often illiquid) floating rate credit, short duration lending, income-generative and inflation-sensitive strategies, and hedge funds with strong diversifying characteristics. Overall, fixed income strategies comprised just 12% of all manager searches in 2021, compared with around 20% or more in 2016-18.

The figures also illustrate extremely strong appetite for private markets strategies: half of manager searches in 2021 were for illiquid [investment strategies in Private Equity](https://www.financedigest.com/procurementin-european-private-equity-investment-adding-value-to-the-boardroom.html "Procurement in European private equity investment – adding value to the boardroom."), Private Debt, Infrastructure and Real Estate, compared with approximately 30-35% in 2016-18. Overall, there was a 30% rise in new [manager search activity](https://www.financedigest.com/with-the-right-active-manager-you-really-do-get-what-you-pay-for.html "With the Right Active Manager, You Really Do Get What You Pay For") in 2021 versus 2020—indicating heightened levels of new allocation activity as investors seek to reposition and optimise portfolios.

Diversification often brings unpalatable choices. Rarely have these been starker than they are now. Classic diversification through more conventional fixed [income strategies has long been rather unappealing through the era of low rates; it is now even more unappetising in an era of forecast-busting inflation](https://www.financedigest.com/stanchart-surprises-with-40-profit-jump-ups-income-goal-on-rising-rates.html "StanChart surprises with 40% profit jump, ups income goal on rising rates"). Although equity markets ended 2021 with a flourish, attaining double-digit gains for the third year in a row, [investors and multi-asset managers were increasingly cautious on overall equity](https://www.financedigest.com/uk-investors-add-1-2-billion-to-equity-funds-in-march-calastone.html "UK investors add .2 billion to equity funds in March – Calastone") exposure, given the imperative to mitigate the effects of heightened market volatility as central banks begin to raise interest rates. Volatility has of course surged further in 2022, amid [Russia’s military assault on Ukraine](https://www.financedigest.com/russia-promises-to-scale-down-operations-in-northern-ukraine.html "Russia promises to scale down operations in northern Ukraine").

**Equity**

Within public equities, [manager search levels](https://www.financedigest.com/understanding-the-different-levels-of-maturity-in-travel-and-expense-management.html "Understanding the different levels of maturity in travel and expense management") remained strong and consistent in 2021. A quarter of all [manager searches targeted this asset](https://www.financedigest.com/asset-managers-on-alert-after-whatsapp-crackdown-on-banks.html "Asset managers on alert after ‘WhatsApp’ crackdown on banks") class, just a little below historic levels. There has been a shift from Global towards Regional mandates—with North America and [Emerging Markets favoured over Europe](https://www.financedigest.com/exclusive-europe-ready-for-baltics-emergency-switch-off-from-russian-grid.html "Exclusive: Europe ready for Baltics emergency switch-off from Russian grid"), even before the geopolitical turmoil that we see unfolding today. In total, 71% of new searches for public [equity managers were directed towards global](https://www.financedigest.com/rate-rise-fears-prompt-third-week-of-global-equity-funds-outflows.html "Rate rise fears prompt third week of global equity funds outflows") strategies in 2020; this figure slumped to 41% in 2021. Conversely, one third of new public equity manager searches targeted Regional Developed Markets Equity (up from 10%), with North America receiving particular attention, and 22% were for Emerging Markets (up from 14%).

Although this asset class has historically shown relatively good inflation sensitivity and performed well in rising-rate environments, this does differ considerably by strategy type. 2021 brought a resurgence in demand for Value and Income strategies; the turnaround in Value appetite was particularly marked after a long period when central bank policies have [essentially favoured Growth stocks](https://www.financedigest.com/3-essential-types-of-stock-research-tools.html "3 Essential Types of Stock Research Tools"). We are now seeing notably heightened appetite for Small Cap strategies, which—one can argue—may produce a more direct inflation pass-through for [investors than larger firms](https://www.financedigest.com/investors-warn-big-consumer-firms-over-price-hikes-as-competitors-gain.html "Investors warn big consumer firms over price hikes as competitors gain"). Appetite for Low Vol strategies has remained muted since their disappointing run in 2020, but we are [seeing signs](https://www.financedigest.com/adecco-sees-signs-of-a-hiring-slowdown-at-start-of-2023.html "Adecco sees signs of a hiring slowdown at start of 2023") of greater interest.

2021 also brought the first explicit targeted manager searches for “Impact Equities” (or, more broadly, Thematic ESG and Impact Equity strategies). Although there is something of an overlap between Impact strategies and the new SFDR Article 9 classification, investors should not overestimate the connection. More broadly, we see strong and [growing emphasis on incorporating carbon and climate-related analysis within equity strategies](https://www.financedigest.com/4-strategies-for-quickly-growing-your-startup.html "4 Strategies for Quickly Growing Your Startup").

**Fixed income**

The proportion of fixed income searches has been in steady decline over the years, [falling from 22%](https://www.financedigest.com/logitech-quarterly-sales-fall-22-as-slowdown-fears-bite.html "Logitech quarterly sales fall 22% as slowdown fears bite") in 2017 to 15% in 2020 and 12% in 2021. Within the asset class, [investors have become more active in seeking](https://www.financedigest.com/ges-investors-seek-solutions-to-renewable-energy-supply-chain-challenges.html "GE’s investors seek solutions to renewable energy, supply chain challenges") out floating-rate exposure, including Leveraged Loans, broader Leveraged Finance and some securitised credit.

Asset owners’ interest in investment grade bonds continued to wane in the [final quarter of the year](https://www.financedigest.com/10-year-david-goliath-crusade-finally-sees-justice-for-off-plan-spanish-property-buyers.html "10 year ‘David & Goliath’ crusade finally sees justice for off-plan Spanish property buyers") as they focused their attention on higher-yielding securities—in the hope that those higher returns can remain above the rising-rate tide. Most telling is the sudden surge of search activity for Emerging Market Debt: there was virtually no new mandate activity from bfinance clients in 2020 in this space, but in 2021 it accounted for 29% of all fixed income searches. US High Yield search numbers were also strong, particularly for strategies focused on shorter duration, higher quality assets. Short-duration High Yield is not a sector with a wide range of ‘off-the-shelf’ product, but targeted searches for custom segregated accounts provide good optionality.

**Private markets**

Floating rate credit exposure, income generation and inflation sensitivity are underpinning [investor demand for illiquid strategies in today’s climate](https://www.financedigest.com/institutional-investors-back-shell-board-lawsuit-over-climate-risk.html "Institutional investors back Shell board lawsuit over climate risk"). Half of all [manager searches in private markets during 2021 targeted Real Assets](https://www.financedigest.com/french-asset-manager-amundi-posts-q3-outflows-of-13-billion.html "French asset manager Amundi posts Q3 outflows of  billion") (Equity and Debt) in 2021, up from 46% in 2020. The rise has been particularly strong in Real Estate, whose [share rose from 16% to 25% after a subdued period of activity at the peak of the COVID-19 pandemic](https://www.financedigest.com/zoom-shares-down-90-from-peak-as-pandemic-boom-fades.html "Zoom shares down 90% from peak as pandemic boom fades"). Other [Private Debt searches rose from 27% to 34% of illiquid investment activity](https://www.financedigest.com/dollar-slides-on-contraction-in-private-sector-activity.html "Dollar slides on contraction in private sector activity"), with a particularly notable rise in demand for short-duration lending strategies such as Trade Finance and diversifying ‘alternative’ lending strategies such as equipment leasing and maritime finance.

Importantly, investors are not being complacent about inflation sensitivity within Real Asset unlisted equity. In Infrastructure manager searches, for example, we [see increasing focus on open-ended strategies—which are more likely to target classic infrastructure assets with strong](https://www.financedigest.com/italys-mps-sees-safe-habour-ahead-after-strong-quarter.html "Italy’s MPS sees ‘safe habour’ ahead after strong quarter") inflation linkages. It is important to carry out in-depth analysis on the likely [impact of inflation](https://www.financedigest.com/russia-could-hike-rates-in-2023-if-inflation-risks-have-big-impact-cenbank.html "Russia could hike rates in 2023 if inflation risks have big impact -cenbank") on specific company types, rather than relying on generic asset class-level presumptions. Within Real Estate, we see particularly strong [interest in niche categories such as Social Housing and Life Sciences research facilities](https://www.financedigest.com/new-gleif-challenge-facility-extends-ability-to-trigger-updates-of-legal-entity-identifier-data-to-all-interested-parties.html "New GLEIF Challenge Facility Extends Ability to Trigger Updates of Legal Entity Identifier Data to All Interested Parties"). Timberland is also drawing attention, due in part to its potential carbon capture characteristics (although here, again, there are major differences between strategies).

**Diversifying strategies**

During the last two years, searches for “diversifying strategies” in liquid markets have shifted away from Multi Asset and Alternative Risk Premia, towards Hedge [Funds](https://www.financedigest.com/what-is-a-hedge-fund.html "What Is A Hedge Fund") and Fund of Hedge Funds. These last two represented 65% of all “diversifying strategies” searches in 2021. Indeed, the hedge fund industry has experienced something of a renaissance in [investor sentiment](https://www.financedigest.com/6-months-to-go-until-brexit-and-investor-sentiment-remains-bold.html "6 months to go until Brexit and investor sentiment remains bold"), supported by strong performance in 2020 and 2021; investors have increasingly sought refuge here amid rising equity market volatility. We see particularly strong appetite for multi-strategy hedge fund approaches, allowing the [manager flexibility to perform](https://www.financedigest.com/goodbye-excel-spreadsheets-hello-performance-management-tools.html "Goodbye excel spreadsheets, hello performance management tools") in different market environments, and market-independent strategies (particularly Equity Market Neutral). Despite the current focus on inflation protection, commodity strategies have received very little focus; we have, however, seen considerable appetite for ‘CTA’ or [Managed Futures](https://www.financedigest.com/what-is-the-future-of-ip-management.html "What is the future of IP Management?") funds, which tend to have significant exposure to commodity markets.

Alternative Risk Premia [demand slumped](https://www.financedigest.com/samsungs-quarterly-profit-plunges-to-8-year-low-on-demand-slump.html "Samsung’s quarterly profit plunges to 8-year low on demand slump") in 2020 and collapsed in 2021 after a dismal period of performance: the average ARP manager lost just over 10% in 2020. Yet 2021 results have been better, in part due to the strong performance of Commodity markets. More importantly, perhaps, managers have made some notable changes to models and processes in an effort to improve resilience and flexibility; we may well [see investor](https://www.financedigest.com/analysis-weary-investors-see-little-respite-to-fed-hike-gloom.html "Analysis-Weary investors see little respite to Fed hike gloom") sentiment improve—especially among more fee-constrained allocators—as the imperative to deliver diversification from conventional asset classes becomes ever more pressing.

**Looking ahead**

The war in Ukraine has reinforced some of the key dynamics that were in play in late-2021: structurally higher volatility, expectations that inflation would exceed forecasts, [concern over how to manage the impact of rising interest rates](https://www.financedigest.com/shares-slip-yields-rise-as-u-s-data-sparks-rate-hike-concerns.html "Shares slip, yields rise as U.S. data sparks rate hike concerns"), and geographic repositioning. Current signs are that many of the key allocator trends of 2021 are persisting in 2022—albeit with a heightened sense of urgency, depending on the investor’s specific situation and liability profile.


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