If you’re looking for a steer over which asset classes will fare best during 2018, you might not have found the roll-out of managed money surveys in December particularly illuminating. But, essentially, they reflect the unique set of circumstances faced by investors 10 years on from the global financial crisis.
It’s accepted that asset prices have been inflated by central bank interventions, so it’s perhaps unsurprising that a recent survey by Royal London Asset Management (RLAM) of 61 investment advisers showed that almost three-quarters of their clients were targeting growth investments. When growth is muted in the wider economy, investors are prepared to stump up for companies that are expanding – and the higher the quality of the earnings, the more they’re willing to pay. So we might reasonably expect growth companies to outperform value plays through the year.
Bond yields remain in the doldrums, so with the prospect of central banks tightening monetary policy over the coming year, institutional investors have increasingly opted for alternative assets, alongside private equity and private debt markets instead of bonds. But these markets can only absorb a limited amount of capital, plus they don’t offer the inherent flexibility and liquidity afforded by equity markets.
A separate survey released by Natixis Investment Managers, which looked at the intentions of institutional investors who, between them, manage more than $19 trillion (£14.1 trillion) worth of assets, provides some telling insights. Most of the institutions surveyed said that the absence of volatility was a major concern, with the rise of passive investment platforms the main culprit. The CBOE Volatility index (Vix) registered an average reading of 11.1 through 2017, substantially below its long-term average. However, it was slightly livelier in December as concerns grew over US tech stock valuations, something that may sound familiar to investors that rode out the late nineties tech bubble. Some argue that the Vix has been artificially suppressed by flows into passive investment strategies; over half of US equity mutual funds are now managed passively, a fivefold increase since the 1990s. Indeed, the IC has raised concerns over the issue of price discovery due to the proliferation of passively managed and quant funds.
