What You Need to Know
- Eighty-eight percent of fund selectors surveyed anticipate interest rate increases, with attendant implications for stocks and bonds.
- Three-quarters said the market environment will favor more active management.
- They plan to add model portfolios focused on tax management, alternatives, ESG factors and income generation.
Investors have taken on too much portfolio risk in a rate environment that has distorted stock values and clobbered bond yields.
That was the conclusion of 80% of North American investment professionals responsible for fund selection and portfolio construction surveyed by Natixis Investment Managers.
The survey findings, released this week, reflect a shift in the market forces that drove stocks to record highs in 2021. Fund selectors now call for portfolio repositioning as central banks contemplate rate increases, markets begin to normalize and the world learns to live with COVID.
According to Natixis IM, fund selectors got it right when they forecast the corrections in progress since the beginning of the year in the stock market, the tech sector and cryptocurrencies following gains of 22% and 27% last year by the Toronto Stock Exchange and Standard & Poor’s 500.
Eighty-eight percent of fund selectors also said they anticipate rate increases, with attendant implications for both stock and bonds.
The survey found that fund selectors are looking to manage investments and investor emotions during the volatile transition to a higher-rate, high-inflation environment.
Most expect more volatility in the stock market and bond market. Sixty-eight percent said more frequent rebalancing will be important as markets churn.
Eighty-four percent reported that they are expanding their model portfolio offering, an approach they say streamlines the investing process, gives clients across their firm a more consistent investment experience and can enhance investors’ potential to outperform the market benchmarks.
“To address their clients’ increasingly complex needs, financial advisors today are using sophisticated strategies and tools that were once available to only the largest institutional investors, which can help give their clients a leg-up on achieving their financial goals,” Matthew Coldren, head of the U.S. financial institutions group at Natixis IM, said in a statement.
Natixis IM surveyed 166 investment professionals across North America who collectively represent $3.9 trillion in client assets under management and are responsible for selecting the products and strategies used to create client portfolios on wealth manager, private bank, family office, wirehouse/broker-dealer, retirement plan provider, insurance and other retail investing platforms.
The North American findings are part of a larger global study conducted in November and December of professional fund selectors representing $12.6 trillion in client assets.
Confident, but Wary
According to the survey, fund selectors are mostly confident in the resilience of the economy. But 62% expect supply chain disruptions to continue until 2023, which they see as the biggest potential threat to the economy, while 44% cite relations between the U.S. and China.
On a macro level, 37% of fund selectors said they are concerned about the economy’s ability to weather tightening monetary policy, while 30% worry about government spending and 31% about COVID variants. Most do not expect new variants to slow economic growth this year.
Yet fund selectors see increased risks for investment portfolios, which have thrived in a market lifted by unprecedented fiscal and monetary stimulus.
The survey found that 86% of fund selectors believe high valuations are distorted by super-low rates, and 66% said valuations do not reflect company fundamentals. Seven in 10 think the stock market has grown at an unsustainable rate.
Survey respondents’ top portfolio risk concerns at present:
- Inflation: 76%.
- Rates: 76%.
- Volatility: 51%.
- Valuations: 49%.
Fund selectors see opportunities for growth this year in a market environment that three-quarters said will favor more active management.
They expect better returns on reopening trade than on stay-at-home trade, value over growth stocks and small-cap over large-cap companies.
Seventy-three percent think Big Tech will remain big and continue to grow unabated.