Investors reshaping portfolios in preparation for greater market volatility

Global investors are reshaping portfolios as they reassess traditional asset allocation and look towards active management amid geopolitical uncertainty and market concentration, according to a study from Schroders.

It surveyed over 1,000 institutional investors, wealth managers and other intermediaries globally, and found that 85 per cent expected greater market volatility over the next year.

In response to the anticipated volatility, respondents were increasing resilience and diversification in portfolios.

Schroders’ Global Investor Insights Survey (GIIS) showed that conflict in the Middle East (69 per cent) and uncertainty around US foreign policy and global leadership (67 per cent) were the primary geopolitical concerns for investors.

Meanwhile, 53 per cent felt commodity and energy price shocks were likely to impact portfolios in the year ahead, followed by further geopolitical escalation (52 per cent) and economic slowdown or recession (50 per cent).

Diversification (84 per cent) and downside protection/capital preservation (83 per cent) were seen as the most important portfolio priorities, while 47 per cent of investors were increasing geographic diversification outside the US.

Against this backdrop, investors were viewing the role of active management more favourably, with 85 per cent of investors confident that it could help achieve investment objectives over the next 12 to 18 months.

More than a third (38 per cent) said they were increasing allocations to active management specifically to reduce index concentration risk.

“In an increasingly volatile world, investors are reshaping portfolios to put diversification and resilience front and centre, while also juggling geopolitical risk,” said Schroders group CIO, Johanna Kyrklund.

“It is telling that in these circumstances, an overwhelming 85 per cent of investors expressed confidence that active managers can help achieve those objectives in the next 12 to 18 months.

“In recent years we have moved from a globalised world prone to deflationary shocks to a geopolitically fragmented world, where restructuring of supply-chains can contribute to inflationary shocks.

“The ability to be selective, manage risk and respond dynamically to fast-moving market conditions is our active edge to navigating these choppier waters.”

Active exchange-traded funds (ETF) were becoming more prominent within portfolios, with lower costs relative to active mutual funds the primary driver for increased allocations.

Investors were found to be taking a more holistic approach to equity allocations across public and private markets, increasingly matching equity strategies to specific portfolio outcomes and not considering equities as a singular block.

Three fifths (60 per cent) of investors using regional or geographic equity strategies said macro and geopolitical uncertainty was a primary challenge in their allocation decisions.

Schroders also noted that credit allocations were evolving as investors sought a broader mix of cashflow, diversification, resilience and return opportunities across both public and private markets.

“Investors are adapting portfolios to a more complex and fragmented market,” Kyrklund stated.

“Diversification across regions, asset classes, investment styles and wrappers is becoming increasingly important in managing risk and building resilient portfolios.

“A holistic approach to public and private assets is also reshaping portfolio construction, with investment objectives looking through a ‘total portfolio approach’ lens taking precedence over traditional benchmarks.”

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