Article: What’s Driving Institutional Asset Allocations?

Damian Handzy, Brendan Cooper | June 24, 2021

What asset managers need to know about funds, factors and fees

Over the past several quarters, equity markets have experienced a clear rotation from outperformance by Growth stocks to outperformance by Value stocks. Here, we explore the relationships between asset allocations, fund performance, post-negotiated fees, and the ongoing factor rotation to Value.

Specifically, we analyzed which types of funds gained the most assets compared to their factor styles (Large- vs. Small-Cap and Value vs. Growth) and compared to the fees they charged. We then examined the factor profiles of the top asset-gaining funds in each category to identify what investors are really getting in their portfolios.

All of this analysis is based on data we’ve collected and analyzed across more than 30,000 funds, over 20,000 institutional plans, and in excess of 50,000 portfolio factors each month. Some of the conclusions surprised us while others were in line with our expectations.

Recent Equity Factor Performance

Our monthly factor performance analyses have tracked the Growth-to-Value rotation from its start in September 2020 through the most recent month. While Growth significantly outperformed Value prior to September, the fourth quarter of 2020 and the first quarter of 2021 both has significant Value outperformance on whichever sub-factor one examines, as shown in Figure 1.

Figure 1: Q4 2020 and Q1 2021 Factor Performance relative to market. The strong outperformance of Value stocks is shown in the light blue bars near the top. Source: Investment Metrics.

Every sub-factor of Value outperformed. Small-Cap (reverse of the Large-Cap shown in yellow) and High Volatility (shown in red) stocks also performed well.

Value stock outperformance continued into Q1 of 2021 and continued to accelerate until April 2021 when the trend temporarily reversed. April’s short-lived return to Growth outperformance was closely tied to Quality and low-risk Growth. Not surprisingly, high Volatility stocks unperformed during that month. But Value stocks came roaring back in May, and Growth stocks displayed a dichotomy where dividend and earnings growth outperformed, yet sales and forecast growth underperformed.

How Asset Gains Are Related to Performance

How have flows and fees behaved? We took a look across US large and Small-Cap reported asset gains and returns.

US Large-Cap, by and large, saw Value gains growing with Growth dropping over the past five quarter, as shown in the bars of Figure 2. The lines in Figure 2 show the performance of those funds, with Value outperforming Growth in the latter part of 2020. In Q1, Value brought in about 27% of the amount it brought in throughout all of 2020 while Growth brought in about 22% of its 2020 assets. We note that the amount of gain roughly equalized by the end of this period.

Figure 2: Large-Cap Asset Gains over 2020 and Q1 2021. Source: Investment Metrics

With Small-Cap, Value funds not only increased over the period, they gained significantly more than Growth funds by the end of 2020. Furthermore, the Q1 gains of Value funds represented 37% of the amount in 2020 while Growth funds gained only 15% of their full 2020 amount.

Figure 3: Small-Cap Asset Gains over 2020 and Q1 2021. Source: Investment Metrics

How Manager Fees Impact Allocation – and Vice Versa

Our post-negotiated fee analyzer tool provides 60 standard universes across equity and fixed income and examines market values and returns for live accounts together with actual fees paid by institutional investors rather than fees made publicly available by the fund manager.

Not surprisingly, there were fewer large mandates in 2020 during the pandemic. Two interesting takeaways emerged when we compared fees associated with inflows and outflows between 2019 and 2020 for Large-Cap funds (both Value and Growth):  Inflows experienced a median fee pullback of 15 basis points (bps) year over year, dropping to about 50 bps, while outflows remained consistent between the years at around 55 bps.

In 2020, Large-Cap Growth fund inflowing investments paid about 10% or 5 bps less than funds outflowing. Large-Cap Value fund inflows, on the other hand, paid about as much as the outflowing money had paid.

Small-Cap Growth has a similar experience in 2020: inflows paid about 12 bps less than outflows had paid. However, the Small-Cap Value space showed a premium in 2020 for inflows versus outflows. In fact, it is the only instance of inflows with higher fees than outflows.

Across the board, we see a strong differential in fees paid between new mandates and terminating accounts where new mandates are charged less than terminated accounts were charged. In Q1 2020, those differences where about 10 bps for both Large and Small-Cap Growth, and about 15 bps for both Large and Small-Cap Value.

Investor Factor Exposure on Allocation

What kinds of factor exposure have investors been getting recently when they invest in these types of funds?

We used our Style Skyline™ to assess the factor exposures of the top 20 gaining funds in each of the fourth categories: Large-Growth, Large-Value, Small-Growth and Small-Value. Large-Cap funds were compared to the Russell 1000 and Small-Cap funds to the Russell 2000.

It was not surprising to find that Large-Cap Growth funds gave investors more growth exposure than the Russell 1000, especially in realized earnings growth and 5-year sales growth. The majority – three quartiles of Large-Cap Growth funds – also provided high Quality exposure when it came to low gearing or low debt. In addition to higher Quality, Large-Cap Growth investors are also getting lower Volatility with about three quarters of the funds having less volatility than the Russell 1000.

The top 20 asset-gaining Large-Cap Value funds in Q1 2021 also provided significantly more Value exposure than the benchmark, with over 90% of the funds having more Value exposure on each measure of Value we examined (book-to-price, cash flow yield, sales-to-price, earnings yield and EBITDA to Enterprise Value). But Large-Cap Value investors also got more Volatility and more Momentum exposure than the Russell 2000.

US Small-Cap Growth funds provided more Growth exposure on all the different growth measures except for forecast growth, which the dominated outperformance of Growth funds over the last several years. Small-Cap Growth funds also offer far greater Quality and far lower Volatility than the Russell 2000. In fact, Small-Cap Growth could be better described as “Small-Cap Quality with some Growth” or “Small-Cap Quality, low Volatility with some Growth.”

Figure 4: Style Skyline™ for the top 20 gaining Small-Cap Value funds compared to the Russell 2000, showing significantly more exposure to Quality, Low Volatility and ESG in addition to Value.

As shown in Figure 4, Small-Cap Value funds indicated substantial exposure to Value, Quality and ESG with much less exposure to Volatility than the Russell 2000. Small-Cap Value managers are actively going after and giving exposure to higher ESG, especially the higher Quality stocks. These funds can accurately be described as high-Value, high-Quality, low-Volatility ESG funds.

In Summary

Based on our analysis, we’ve concluded that factor or style performance drives fund and asset flows and fees. Asset gains in Q1 2021 are similar to those in 2020 for Large-Cap, but they are skewed towards Value for Small-Cap. Fees are clearly impacting flows in the Large-Cap space where we saw fees decrease by 15 bps. Small-Cap Value fees are the only to increase, albeit modestly.

Across the board, we’re seeing the Growth premium last despite the performance rotation to Value. We’re also seeing sizable discounts in fees for new mandates compared to those already terminated. In the end, both Small-Cap Growth and Value carried Quality exposure and delivered strong ESG – something to watch going forward.


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Investment Metrics, a Confluence Company, is a global leading provider of investment analytics, reporting, data and research solutions that help institutional investors and advisors achieve better financial outcomes, grow assets and retain clients with clear investment insights.