Alpha seeking funds fell 10 percentage points between the beginning of 2017 to the end of 2018 as ETFs grew 10 percentage points over the same period, according to BlackRock Portfolio Analysis and Solutions (BPAS).
BPAS’s recent report analysed the asset allocation and strategy trends of over 600 client portfolios, from wealth managers, financial advisors and family offices within the European, Middle Eastern and African (EMEA) regions.
In 2017, ETFs only accounted for 10% of BlackRock’s client portfolios but grew to 21% by the end of 2018. Looking at the investment vehicles used to invest in equity, fixed income and commodities, ETFs’ allocation for these asset classes all grew from 15%, 13% and 81% to 34%, 31% and 96%, respectively.
Alternatively, alpha-seeking mutual funds, which held the majority of asset allocation in 2017, fell significantly from 86% to 76% at 2018.
Following the analysis of the 600 portfolios, BlackRock observed three themes throughout. Firstly, alternative allocation or the favoured allocation. Regardless of the target risk profile of the portfolio, asset allocators were in agreement of the importance of alternatives within portfolios, according to BlackRock.
The sample portfolios on offer by BlackRock have an average allocation of 25% in conservative, 21% in balance and 23% in aggressive. This is driven by investors’ appetite in developing resilient portfolios amid volatile periods. BlackRock recommends using ETFs when investing in core bonds to have a buffer of liquid assets.
The second theme seen is the neglect of foreign exchange risk. Client consultations often make it apparent the misunderstanding of asset allocation differing from risk allocation. Unhedged strategies can face reduced returns as a result of neglected foreign exchange risk which is found to be the second largest portfolio risk contributor.
Finally, the third theme seen is the large allocation in cash. An average of 9% of all portfolios lies in cash which is likely to be the result of significant market volatility seen in 2018, in particular Q4. Asset managers, such as BlackRock, are keen for investors to put their capital in to investment products rather than sit on the cash.
A suggestion BlackRock makes is to create liquid sleeves which bring portfolios closer to its strategic asset allocation in volatile times.Cheap equity and bond ETFs are a good example of liquid sleeves which enable investors to quickly react when markets turn.