Fund managers double down on defensive positions as inflation soars
Investors are boosting cash holdings and piling into real estate this year as they look to stave off the worst impacts of soaring inflation and market volatility sparked by Russia’s invasion of Ukraine.
A closely watched survey of global fund managers this week found that the outlook for global growth plunged to its lowest level ever last month, spurring investors to seek steadier ground away from turbulent equity markets.
Cash balances among fund managers hit 6.1 per cent in early May, the highest level since September 2001, while equities are at their most underweight since May 2020, according to Bank of America’s fund manager survey.
The surge in cash allocation comes after a tumultuous period which has seen tech titans and growth stocks shed value. Analysts at investment platform Hargreaves Lansdown told City A.M. that rising interest rates and inflation would see investors shun equities for the foreseeable future.
“Inflation – and the reactive Central Bank policy – has seen a significant sell-off in growth stocks since the beginning of the year. The NASDAQ has been under pressure and value stocks, and those which benefit from higher interest rates such as financials, are back in favour,” Emma Wall, head of investment analysis said.
“Fund managers who have the ability to invest in different asset classes are doing so, while equity managers are holding higher levels of cash and buying into stocks they like on the market dips.”
Wall told Morning Wire that managers are likely to double down on defensive positions this year with most now predicting a recession in 2023.
Fund managers are also looking to diversify their asset holdings to provide protection amid soaring inflation, she said, with real estate investment rising this year.
“Real assets and alternatives offer portfolio diversification – and in times of market volatility such as these, ballast,” she said.
“Real estate and infrastructure are less correlated to equity markets, though in times of extreme stress it’s worth noting that you often see this benefit erode.”
At the end of 2021, the total global real estate assets under management reached a new record high of €4.1tn, a 23.8 per cent increase compared with the €3.3bn AUM recorded a year earlier, according to research from European real estate investment groups ANREV, INREV and NCREIF.
The total AUM of the top 10 managers surpassed €1.tn, a 41.6 per cent increase year-on-year, with an average AUM of €169.4 bn.
Paul Jackon, global head of asset allocation Research at Invesco told City A.M. that real estate investment offered a buffer against the economic headwinds.
“Many investors consider real estate to mitigate against inflation because rental rates may rise with inflation,” he said.
“This could be a reason why the asset class may become more popular, though rising bond yields could depress the present value of future rental flows.”