Following a solid year of corporate earnings recovery, 2022 is likely to be a year of change, bringing both challenges and opportunities for institutional investors. According to recent survey findings by Natixis Investment Managers, nearly half of institutional investors in the U.S. and globally expect economic growth to return to pre-COVID-19 levels in 2022.
Using the Investment Metrics Global Database – containing 2500+ firms, 68,000+ products, and 380+ peer groups, and 5400+ benchmarks – we analyzed asset flows and manager fees, revealing four noteworthy trends and a view of what we can expect in 2022.
Similar to 2020, institutional investors did a substantial amount of rebalancing in 2021. Approximately $197 billion came out of active equity strategies and $114 billion went into active US fixed income strategies through September, with US core and US core-plus fixed income active manager portfolios emerging as the main beneficiaries.
Large asset class performance disparities led to increased rebalancing activity for institutional investors due to the changing asset class portfolio weightings. Additionally, we have not seen much movement in the asset class allocations by institutions over the past three years, which again highlights the rebalancing activity that has been happening.
In 2022, we expect to see continued rebalancing activity coming out of public equity and into US core and core-plus fixed income with the anticipation that equity markets will continue to do well compared to US fixed income.
Public equity allocations
In 2021, the search for yield by institutional investors was apparent, presenting itself through the type of active manager mandates that have been awarded throughout the year. Institutional flows increased to very concentrated public equity portfolios (approximately 40 holdings) with high active share figures and high tracking error.
Furthermore, there has been increased interest in China-only equity portfolios. This has led institutional investors to question whether or not they need dedicated stock pickers to bring in active returns from a very opaque market.
Going forward, institutional investors will hone their focus on active managers in their public equity allocations which have provided exceptional returns and more transparency compared to some alternative investments.
More ESG analysis
2021 saw a greater focus on environmental, social, and corporate governance (ESG) analysis and its incorporation by pension plans. This has resulted in more ESG active manager portfolios gathering assets. Some of the most noteworthy were Janus Henderson’s Global Sustainable Equity portfolio, AllianceBernstein’s Sustainable Global Thematic portfolio, and Morgan Stanley’s Global Sustainable portfolio, all of which received over $1 billion in institutional net flows.
In 2022, institutional investors will increase their focus on ESG analysis particularly on diversity and inclusion by pension plans, leading to more women-led portfolio management teams winning mandates.
Overall, fees have decreased over the past three years for active manager equity portfolios. Interestingly, for US large cap equity asset managers, we have not seen much of a change in fees for mandates between $75 million and $200 million at a median level. This could be due to active managers having already renegotiated their fees prior to 2018.
On the other hand, similar to what we have been seeing elsewhere, the non-US large cap equity portfolio fees have come down significantly as many active managers renegotiated their fees to hold on to mandates. The active asset manager environment is becoming increasingly more competitive, which has contributed to fee compression.
In 2022, we expect active management fees to stabilize and stop gravitating downward. While many managers have been able to hold on to assets, significant numbers have also been fired for poor performance. At this point, high performing managers are able to retain their mandates and charge higher fees across all active product classes. We may even see active managers begin to fight back against active manager fee compression.
Challenges to overcome
This year, institutional investors will face their biggest obstacle: how to prudently hit their target returns given the low fixed income returns being offered while controlling risk in the plan portfolio. Following an exceptional period for public equity markets, asset allocators will need to be prepared for a more familiar and reasonable public equity return environment in the future.
The material presented in this document is an assessment of the market environment as of the date indicated; is subject to change; and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding any funds or any issuer or security or similar.
This document contains general information only, does not consider an individual’s financial circumstances and should not be relied upon for an investment decision. Rather, an assessment should be made as to whether the information is appropriate in individual circumstances and consideration should always be given to consult a Financial Advisor before making an investment decision.
Investment Metrics, a Confluence company, does not provide investment advice and nothing in this document should be considered any form of advice. Investment Metrics accepts no liability whatsoever for any information provided or inferred in this document.