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The return of volatility in equity markets since the end of 2018 sounded the alarm for institutional investors reassessing their asset allocations. With corporate borrowing at a record high and western equity market indices edging down from their recent peaks, investors are considering whether they have reached the end of the current economic market cycle.
At the end of March 2019, the yield spread between three month and 10 year Treasuries fell below zero for the first time in more than a decade, which Bloomberg labelled “the most significant inversion yet” in terms of indicating of an imminent economic downturn.
Given the repeated warnings from market economists, pension schemes are looking to lock in their returns from the past decade, weighing up the potential that exists in allocations to multi-asset investment strategies.
A survey of consultants’ asset allocation expectations within Research in Finance’s 2018 UK Institutional Market Study, found that 44% of respondents expected allocations to multi-asset strategies to increase in 2019, compared to just 9% who expect them to fall.
Matthew Towsey, principal and head of liquid alternatives at Aon, explains that investors are now reviewing their portfolios following the rapid rise in equity markets over the past 10 years.
“The increase in allocation to the multi-asset space is off of the back of what happened in 2018,” he said in an interview. “Prior to 2018, we had seen a steady rise in equity markets and investors were happy, but heightened volatility in equities, from December, led people to reassess their portfolios.”
Consultant responses to the 2018 UK Institutional Market Study suggested that allocations to multi-asset and absolute return strategies would be two of four asset classes likely to see significant increases in allocations in 2019, alongside infrastructure and liability driven investment strategies.
Throughout 2018, a range of economic indicators prompted a rethink in investment allocations. The rise in Italian bond yields in May, volatility in from events in Turkey and Argentina over the summer, and choppy western equity markets at the end of the year, all fed into assessments.
Investor concerns have since shifted to the prospect of slowing western economies and weaker international growth. Emerging markets are expected to play a bigger part on the global economic direction, with Chinese monetary policy, for example, being revised to stimulate growth.
“The rise in interest in multi-asset allocations is a response to 2018,” Towsey explains. “Whether it is hedge funds, alternative risk premia, absolute return bond funds, investors are seeking strategies that have little or no correlations.”
The hunt to find multi-asset strategies that have unique characteristics, however, can be a tricky business, so trustees are employing consultants to discover strategies which look like they will deliver something unique.
Typically, consultants like unusual research or investment processes, according to Towsey, preferring investment firms which are employee-owned, or where fund manager remuneration is linked to fund outperformance.