Insights on the investment behaviour of institutional investors provides the 360 degree analysis Photo: naufalmq Source: iStock

Institutional investors’ response to turbulent markets

Author: Markus Neubauer, Managing Director Universal-Investment

With the markets very hard to predict nowadays, how are investment professionals responding to these challenging times? The Universal-Investment Investor Analysis shows: with resilience and a long-term approach.

Markus Neubauer, Managing Director Universal-Investment Source: Universal-Invesment

Who still remembers the stock market crash of the start of the year? Or the China crisis? With one momentous event following on the heels another, today’s earth-shattering news is tomorrow long forgotten. If we take China’s 6.7% economic growth figure quoted in the second quarter of 2016, for example, most market spectators and commentators who would have regarded such a figure as apocalyptic only at the start of the year have meanwhile fully accustomed themselves to the new status quo.

Other topical examples, including Brexit and international terror, or the ECB's zero interest policy and extended bond purchasing programme, mean that today’s fund investors not only need to be resourceful, but must also have nerves of steel. Institutional investors have both of these qualities, our figures show.

Universal-Investment’s client data provide a by-and-large representative view of institutional investors’ activities. As the operator of Germany’s largest independent platform for institutional investments, Universal-Investment analyses all the investments in segregated mandates which it administrates. This analysis is performed from the perspectives of investor type, asset class and performance, and aggregates the results from January 2012 to the present day. On our platform, it is the investors who decide on their strategic asset allocations, while the choice of tactical allocation to the segregated mandates is always made by external asset managers. As such, we are able to assess the past four years’ data impartially.

Equity remains ahead

A year ago, we described how equities were becoming increasingly attractive for institutional investors compared with the traditional safe haven for investment: bonds. This finding still holds true today.

Equities are trending sideways at a high level

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As of: 30.06.2016 Source: Universal-Investment

Market volatility has slowed the rise, resulting in a sideways movement for the equities quota held by institutional portfolios over the past twelve months. Bonds, however, have continued to lose favour over the same period, their quota falling from 51% in September 2015 to just under 48% at the end of June 2016.

Diversification with real assets

Apart from broader diversification within the equity asset class, institutional investors have increasingly been turning to real assets to minimise the impact of volatility on their portfolios. As a result, property now accounts for EUR 5 billion, or 2.5%, of their portfolios. Participation and infrastructure projects add another EUR 15.4 billion or 7.8% to this figure, boosting the real-asset and real-estate quota to over 10%. This is in marked contrast to the under-1% quota at the start of 2012.

Bonds at a disadvantage

With yields on German 10-year bunds having recently turned negative, and those of the Swiss and Japanese governments already so for some time now, it is hardly surprising that, against this bond backdrop, investors are looking for alternatives. While this would have primarily meant equities in “normal” times, many portfolios’ equity quotas have reached levels which are taking investor exposure to borderline levels. Accordingly, the stock market’s recent high volatility has had a far greater impact on institutional portfolios than in the past when such movements would have typically been offset by large, stabilizing bond positions.

Bonds continue their descent

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As of: 30.06.2016 Source: Universal-Investment

This effect has been further aggravated by changes in the composition of bond portfolios over the last few years. For some time now, the market has been seeing a steady shift away from government bonds towards corporates, a trend which is further exposing investors to the ups and downs of the private sector. A glance at the figures from the beginning of 2012 to mid-2016 shows only one type of bond with constant gains, namely corporate bonds, which have risen from 19% to 33% of the overall bond quota. At the same time, the weightings of government bonds and other categories have been falling, with the most marked slump being in covered bonds – down from 16% to a mere 6%.

Corporates outperform government bonds

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As of: 30.06.2016 Source: Universal-Investment

Hedging strategies accompany rise in risk exposure

Many institutional investors have weathered the turbulent first half-year on the stock markets without dramatic losses, despite their higher risk exposure. While Germany’s leading share index, DAX, lost around 5% over the first half-year, portfolios on the Universal-Investment platform gained 1.3% on average. And even if we focus on equity engagement only, the portfolio still significantly outperformed the mainstream market with a mere 1.5% fall.

One reason for this is the hedging strategies used by most investors nowadays: with modular overlay management, different segments of a portfolio are allotted to different risk classes. These classifications have been continually updated with new data over the past years, thereby ensuring that an asset’s true risk potential is reflected with increasing accuracy.

This allows each individual risk budget to be managed to mirror the investor’s objectives. Any remaining risk budget in an asset class can be transferred to other classes to avoid the risk of a full hedge, thereby enabling an investor to optimise returns while avoiding a materially higher risk exposure.

Performance – How a long-term strategy pays off

These benefits can be observed in the performance of segregated mandates over the ten years ending June 2016: despite the market’s recent volatility (see graph), investors still successfully weathered this year’s crashes, returning a more-than-1% gain over the first six months of the year.

If we look back one year from June 2016, the negative developments in the second half of 2015 are also evident, manifesting themselves in a 12-month performance of just 0.25%. Yearly performances for periods of two or more years are very clearly positive, the period for three years being the clear leader at over 5%.

Long-term performance tending towards 4%

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As of: 30.06.2016 Source: Universal-Investment

Over a longer time period, performance homes in on around 4% – a key threshold value for many investors. Looking back over the 10 years ending June 30, 2016, performance is 4.14%. This longer-term stabilisation is not only apparent for 2016, but also for 2012 through 2015. For the sake of comparison, let’s take June 30 of each year as the reporting cut-off date.

Performance comparison for different reporting cut-off dates

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As of: 30.06.2016 Source: Universal-Investment

While year-to-date and 12-month values vary significantly from one year to the next, they converge over time. For the ten-year period, they exceed 4% for four years out of five, the strongest two years being 5.2%.

Methodology

The analysis covers all assets in segregated mandates which were administrated by Universal-Investment over the period 01 January 2012 to 30 June 2016. The figures are updated monthly. The total volume of analysed assets is currently around EUR 198 billion (GBP 170 billion). This is 14.1% of the total EUR 1,401 billion (GBP 1,205 billion) of assets held in segregated mandates in Germany at the end of May 2016, as published by the German investment association, Bundesverband Investment und Asset Management (BVI). 

Assets in segregated mandates

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As of: 30.06.2016 Source: Universal-Investment