As we stated few months ago, the year 2022 is on its way to become a remarkable period evidenced by unseen events in the lifetime of many investors, including the heighten risk to enter a global stagflation, as well as to see a long-lasting war unfolding in Continental Europe. All this has increased the likelihood of ending up in a much-predicted secular bear market for equities, which incidentally the Nasdaq is already in.
During the year to date period central banks have announced a succession of rate increases in the face of exploding inflation fueled by geopolitical events and supply-chain constraints.
As a result, financial markets are sustaining a period of repricing that started in the fourth quarter of 2021, leaving little place to hide for investors seeking to protect capital or accumulated performances. Indeed, only a few very specific assets such as oil, commodities or military equipment, those to which few portfolio managers wanted to be exposed, generated significant positive returns.
In this context, the most decorrelated funds such as in cat bonds or equity market neutral, or those with exposure to value stocks were among the best performers.
The surge of oil & gas prices provided a support for a few global energy transition themes. More defensive assets also benefitted from growing risk aversion, such as funds in Infrastructure.
In our selection across all asset classes 28% of active fund managers still managed to outperform their benchmark during this exceptional, but yet short period. A meager result by historical standards, but still an honorable score in regard to the massive repricing environment, proving that alpha can persist in spite of odd market conditions.
We anticipate that once valuations readjust to levels more based on fundamental and less on fads, active managers should be able to generate robust alpha in markets willing to reward a sound fundamentally-based asset allocation.
As far as our activity is concerned, we have had to intensify our communication with clients to keep them abreast of portfolio managers’ view and outlook in the wake of persisting negative market performances.
Inflation, central banks action, and consequences of the war in Ukraine were the main topics of discussion. They were looking for solutions to protect their portfolios and performance from geopolitical and stagflation risks. For most, the answer was to adopt a risk reduction attitude first by increasing cash, then by looking to redeploy capital in either decorrelated assets or value based. In that context we have seen growing demand for funds investing in gold, dividend stocks, multi-assets, or alternative absolute return strategies. Preference for liquid funds remained a determining factor in the choice, which prevented us from promoting attractive opportunities in less liquid segments of the credit markets or in alternative assets for instance.