Fund selectors in Asia view volatility as their top portfolio concern, bucking the trend globally where inflation and interest rates were viewed as bigger headaches, according to a survey from Natixis Investment Managers (Natixis IM).
According to the survey, when asked about the year ahead, inflation (70%) and interest rates (63%) ranked as the top two portfolio concerns globally, which is high compared to Asia, where volatility (65%) ranked number one ahead of interest rates (56%) and inflation (51%).
“This does not come as a surprise as the impact of volatility spikes tends to overly affect the performance of fund selectors in Asia,” said Dora Seow, Singapore CEO of Natixis IM, in written responses to FSA’s questions.
“Either through increasing currency hedging costs or flight-to-safety/risk off movements, increases in volatility affects more fund selectors in this region than to those in developed markets. Moreover, focusing on volatility, particularly implied volatility, gives investors signs of potential looming market stress episodes that may take place.”
Natixis IM surveyed 441 professional fund selectors at firms managing over $30trn in total client assets from leading wealth management, private bank and insurance platforms, of which 43 were based in Asia.
The survey found that fund selectors in Asia had a higher overall average long-term return assumption of 10.2% compared with 8.8% globally.
Though few believe they will need to make wholesale changes to portfolio strategy to achieve return expectations, they are planning small but significant shifts in allocations.
Seventy percent of fund selectors in Asia believe that rising interest rates will usher in a resurgence in fixed income, with 63% saying they will increase investments in government bonds, higher than the global average, and another 54% said they will increase allocations to investment grade corporates, also higher than the global average.
Alternatives remains a popular asset class among fund selectors in Asia despite the expected improvement in returns from public markets, with 60% saying they will recommend increasing returns to alternatives.
Within alternatives, infrastructure is the standout sub-sector with 60% saying they are likely to increase allocations to it followed by private equity (32%), absolute return strategies (32%) and commodities (32%).
Meanwhile, sustainable investing in Asia is expected to see the biggest allocation increase in 2023, with 61% of fund selectors saying they will increase allocations, matching the global average. In Asia, 51% agree there is alpha to be found in ESG investing.
“The increase in sustainable investing allocation can be attributed to where capital growth is expected – It is clear that capital continues to flow towards ESG and sustainable investments, by governments, institutional and retail investors, and with technology further
advancing, this is unlikely to stop,” said Seow.
“Investors will undoubtedly be more discerning with the type and quality of the ESG investments going forward, as the need for sustainable investing solutions continues to rise.”