FlexShares’ Darek Wojnar explains how to support investors through periods of market volatility.
The first quarter of 2023 saw a notable wave of nervousness and uncertainty among investors worldwide as a multitude of situations presented new challenges and exacerbated market volatility.
One of the primary drivers of investor uncertainty was the continued rise of inflation and the hike of interest rates.
As central banks struggled to balance curbing inflation and maintaining economic growth, investors remained uncertain of future monetary policy.
Increased banking pressures also contributed to an atmosphere of caution and unease in the financial markets after confidence was shaken following the collapse of Silicon Valley Bank and the emergency takeover of Credit Suisse by UBS.
Darek Wojnar, head of funds and managed accounts at Northern Trust Asset Management, explains how the changes to the market environment in Q1 shifted client demands and discusses how to prepare for further potential turmoil in the future.
He also highlights how Northern Trust’s ETF specialist arm FlexShares, which has US $21.1 billion in assets under management, as of 31st March 2023, prioritises engagement to support clients through volatile times.
Unsurprisingly, many institutional and intermediary clients in the US and globally were rattled by the constant flux in the market in early 2023.
However, limited preparation by advisors to deal with the changes led to a heightened sense of uncertainty among many investors.
Wojnar explains that many professional investors and advisors have never experienced a situation of continued interest rate rises and persistent inflation in their lifetime.
As a result, they were underprepared on how to deal with the situation. This is why investors must adopt a longer-term view to ensure they stay ahead of changes to market conditions, says Wojnar.
“Investors that have been engaging with us [in that way] are able to take a more strategic view and [make the] tactical adjustments that portfolios often benefit from, nevertheless, not focusing solely on short-term changes.”
Wojnar further explains that engaging with a longer-term view will ensure advisors prevent clients from making rash decisions and allow them to achieve their long-term goals and grow capital – this is the ultimate role of an advisor.
Taking a five-year outlook on various markets enables advisors to present themes that might impact clients’ investments now and place emphasis on themes that may be more pronounced in the future, added Wojnar.
This will allow investors to be more prepared for when difficult events occur instead of having to be reactive when sudden changes happen.
According to FlexShares, a proactive engagement approach is key to supporting investors through periods of market volatility.
Wojnar says that forums are a particularly effective method for improving engagement as it allows clients and professionals to openly discuss current and potential future challenges and to share ideas on what support can be provided to reduce the impact.
“We've held a number of forums speaking with clients and investors, essentially asking their perspective on how we can be better partners to them,” says Wojnar.
“One thing that stood out is that they all appreciated being around the same table with the Northern Trust Asset Management Professionals, discussing the issues related to market volatility, like rates going up and persistent inflation.”
These forum settings are effective because they provide clients with an opportunity to discuss their concerns and allow professionals to address how to deal with these concerns and educate clients, says Wojnar.
Wojnar explains FlexShares professionals can sometimes provide solutions through products that already exist, but sometimes they take a longer-term view and partner with clients to design something bespoke to suit the specific concerns of a client.
Shift in investor demand
Current market conditions have caused a shift in investors’ demand for different asset classes. Therefore, advisors must engage with clients to understand what best suits their portfolios and meet client needs, says Wojnar.
Although demand for asset classes varies across the firm’s client base, Wojnar notes there were some distinct areas of commonalities throughout the first quarter of 2023.
FlexShares supports the view shared by many firms that lower equity returns are expected in the context of the global equity outlook over the next five years, which will see an increased demand for good-quality companies with low volatility risk.
Wojnar explains a large proportion of recent conversations with clients have focused on companies with high-quality balance sheets, that pay dividends and have lower volatility profiles.
These unique characteristics are an effective tool to “allow investors to continue benefiting from capital appreciation and knowing that maybe a bigger portion of return from equities will come from dividend-paying companies, as well as from those less impacted by the short-term trends.”
Investors are also demonstrating an increased appetite for alternatives, and US investors’ preference has shifted towards companies in the natural resources sector which have a focus on energy transition, says Wojnar.
Wojnar explains that climate-risk-related investments and alternatives are effective tools to protect clients during market volatility because they can diversify portfolios and provide potential opportunities for enhanced returns by improving the portfolio’s risk-return profile.
“Whether clients are looking through long-term equity portfolios that attempt to grow capital while managing their ESG concerns or climate risk concerns, or whether they look at alternatives in any fashion, that can help stabilise portfolios by being less correlated with those main asset classes.”
Wojnar also notes that across the FlexShare line-up of 32 ETFs, the Listed Private Equity ETF (FLPE), with $185 million assets under management, has received a recent surge in demand from investors, as it is a useful asset class to provide more stability and greater profits, says Wojnar.
“For many investors, it's a great addition that allows them, within the context of the portfolios they manage, to have exposure to companies that predominantly build their business around private equity markets.”
Private equity also remains the most attractive asset class to European investors, with 63% of institutional investors expecting to make private equity their largest allocation in the next two to three years, according to State Street.
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