Financial Mail - Investors Monthly
DIVERSITY IS KEY
Careful portfolio allocations are essential
Before the coronavirus outbreak roiled global markets, the preference for passive investments that characterised 2019 continued to outstrip active fund demand at the start of the year.
Morningstar’s 2019 “Global Fund Flows Report” indicates that index funds’ share of longterm assets grew in 2019 from 28.6% to 31.0%. The funds that were hit hardest by the shift from active to passive exposure were active equity funds, which lost $357bn to outflows in 2019, while passive/index equity funds attracted $366bn.
The trend continued into 2020, with BlackRock’s February iShares report showing that global flows into exchangetraded products (ETPs) totalled $67.3bn in January.
However, flows dropped 42% to $28.4bn in February, driven by large outflows in the last week of the month when investors sold $37.2bn across asset classes due to fears about the coronavirus’s impact on global economic growth. It was the worst week for outflows since records began in 2011.
Despite the dip, BlackRock reports that multi-asset investors are increasingly leveraging ETFs to navigate the volatility and to position their portfolios better for uncertainty by having access to markets and making portfolio allocations quickly and cost-effectively.
However, as in the case of any risk-adjusted portfolio, diversification should underpin prudent passive fund allocations, particularly in the current market volatility.
Eugene Visagie, client portfolio manager at Morningstar Investment Management SA, highlights potential risks when investing in passive index tracker funds, particularly those that track smaller, less diversified markets like SA’s.
“Because passive investments are rules based, clients might be overexposed to certain, potentially more expensive, counters. For example, in SA that could be Naspers, while in the US it would be technology stocks. In times of heightened volatility, these shares tend to sell off most aggressively, in which case overexposed passive investors would have nowhere to hide.”
Unsurprisingly, figures from BlackRock’s iShares report show that when coronavirus fears gripped the market, investors sold $31.5bn of equity exchange-traded products (ETP) and $6.2bn of fixed income ETPs, and that sentiment towards credit also dampened. Monthly outflows in February from high-yield ETPs hit a new record.
Amid the prevailing volatility, various asset managers are adjusting their portfolio allocations. But many are sticking to their passive slant.
Andrew Keegan, head of wealth in the Client Portfolio Solutions team at BlackRock, explains that over the past few months the asset manager has used ETFs alongside other tools to diversify its model portfolios and adjust risk.
“We’ve done so by increasing exposure to high-quality sovereign bonds, US and the Europe equity minimum volatility index, and real estate securities while maintaining our gold allocation.”
Interestingly, within equities, the trend towards environmental, social and governance (ESG) continues unabated, despite the market fears, as investors appear focused on long-term risks and re-allocation relating to these factors. As a result, $5.6bn flowed into global sustainable ETFs in February, $1.2bn of which came in the last week.
“Just as investors have embraced index investing for efficient, transparent and scalable market exposures in traditional portfolios, ETFs are enabling investors to pursue sustainability objectives actively and take control of their investment outcomes,” explains Stephen Cohen, head of iShares EMEA at BlackRock.
“Providing ESG equivalents and innovative thematic products will further steepen the ETF adoption curve, as investors seek out the most efficient market exposure tools with which to navigate markets,” he says.
As investors continued to search for safer havens, commodity ETPs attracted inflows in the final week of February amounting to $1.8bn, with the majority of this allocated to gold ETPs. According to the BlackRock report, investors have continued to favour the commodity for diversification amid market volatility as well as a lower-for-longer interest rate environment. By the end of February the precious metal had attracted $6.9bn in inflows.
“As the duration and magnitude of the dip in global growth is uncertain, we are primed to adjust the risk profiles as the data evolves,” says Keegan. ●