The economic harm to individuals, businesses, and institutional investors mounts daily due to the COVID-19 pandemic. Financial markets have also witnessed a wild ride following the fastest 30 per cent drawdown in the history of equity markets, as well as a virtually unprecedented illiquidity seizure in fixed income markets. This was accompanied by one of the shortest bear markets on record and key indexes reaching new highs.

The bfinance Asset Owner Survey was conducted to ascertain what investors have learned from 2020 so far. We received responses from 368 global investors, just over half of which are pension funds, with combined assets of approximately US$11 trillion. This also included responses from 34 Australian investors, the majority of whom were superannuation funds, as well as some insurance companies and endowment trusts.

The results found there is less of a sense of panic, and greater investment discipline taking place among many leading institutional investors in Australia and around the globe.

Here we identify seven key strategies that asset owners are employing to ensure their portfolios remain resilient during COVID-19.

1. Increased scrutiny on investment manager fees

Super funds and other asset owners continue to apply pressure on fees, and in the midst of the pandemic it remains one of the key strategies to improve overall fund performance. The process of validating investment manager fees helps super fund trustees determine where they are already getting good value for money and where investment manager fees should be renegotiated.

bfinance’s experience shows that investors can improve value for money and reduce fees by up to 10-20 per cent by employing a range of tools including fee reviews/renegotiation, mandate consolidation, deconstructing manager performance using new techniques, adopting different fee structures, assessing hidden costs, using alternative access points and adopting manager selection methods that maximise competition. Yet these tools are not all equally effective for all asset classes and should be implemented with care.

2. Reviewing strategic asset allocations

After a decade-long bull run, asset owners had already considered the idea that a correction was on the cards, and these views were reflected in asset owners reviewing and adjusting their asset allocations during the pandemic.

The bfinance asset owners survey highlighted that 24 per cent of respondents were changing their strategic asset allocation and many of those shifts appear to be a continuation of these long-term trends, while 35 per cent are making changes to their risk management processes.

Most also appear happy with the results that have been delivered by their actively managed strategies relative to appropriate benchmarks.

3. Pursuing distressed strategies

One third of investors have invested in distressed or opportunistic strategies that “explicitly seek to benefit from the pandemic fallout”, with nearly half of this group currently seeking to do more (14 per cent). In addition, a further 22 per cent who haven’t yet invested are interested in doing so.

The most significant determinant of whether investors are interested in distressed assets is their size: 55 per cent of respondents with over US$25 billion in assets have already implemented exposure to this area.

In terms of opportunities being targeted, most investors point to distressed credit, but a wide range of strategies were mentioned, including private equity secondaries, relevant hedge fund strategies, structured credit, and real estate.

4. Reviewing underperforming managers

A “wave of reviews and replacements” of underperforming managers could be on the cards in 2020 and 2021, with 54 per cent of asset owners indicating they were considering terminating asset managers primarily based on poor performance. The research also shows there is widespread frustration around emerging market debt, hedge funds and risk premia.

Only one in five investors are axing managers based on recent results, but substantially more are likely to do so (35 per cent). There is a distinctive regional skew to results, with European investors more likely to hang onto all of their incumbent managers while those in North America and the Asia-Pacific regions are more likely to be making terminations.

There are also some variations according to investor type. Insurers are less likely to be axing

managers, with 58 per cent saying they’re “unlikely” to be making external manager terminations based on disappointing 2020 performance – a view shared by only 18 per cent of family offices and none of the sovereign wealth fund respondents.

5. ESG considerations continuing in importance and likely increased due to COVID

COVID-19 has continued to push ESG considerations to the forefront amongst institutional investors. Almost four in five respondents consider ESG issues to be either “very” (35 per cent) or “moderately” (43 per cent) important to their investment strategy and implementation, while just 4 per cent consider them to be of no importance.

Closer analysis of these results shows that North American investors and insurers are, on a relative basis, less likely to consider ESG matters “very important” although the gap between regions does appear to have compressed somewhat since bfinance’s 2018 Asset Owner Survey. In Australia, 22 per cent of the respondents indicated that they expect ESG issues will become “more important” to their institution as a result of the pandemic.

We also note that pension schemes are more likely to consider ESG “important” than other investor types. Yet the most significant factor determining ESG approach is size: larger investors are substantially more likely to emphasise ESG issues than their smaller counterparts, and this trend is consistent across different types of respondent.

Looking ahead, one third of investors expect ESG issues to become more important as a result of the COVID-19 pandemic and its impact on markets/economies, while no investors expect them to become less important. In addition, a substantial minority indicate that the crisis will affect the way in which they implement ESG considerations.

6. Increased exposure to private markets

The pre-COVID three-year period largely saw a continuation of trends that were initiated in the post-GFC window phase, such as a shift towards illiquid strategies, broader geographical diversification (including emerging markets), and the shift towards private market strategies.

Research conducted earlier this year by bfinance showed that the first quarter of 2020 brought a rise in new mandates launched by the firm’s clients. This was particularly true in private markets, which represented 52 per cent of all searches initiated in the quarter.

7. Adapting to a virtual world: investors no longer travelling to select new managers and investments

Investors are currently split on whether the lack of face-to-face contact poses a significant obstacle to identifying and investing in new asset managers and investments.

European investors seem a little more at ease on this issue than their peers, while Family Offices and Endowments/Foundations are more likely to call this issue a “major obstacle” than other investor types, indicating the importance of in-person contact to these communities. Somewhat unexpectedly, larger investors appear more concerned about this subject than their smaller peers – a rather counterintuitive finding given the presumption that larger investors may have more in-house resources at their disposal and be more likely to secure ‘above-and-beyond’ measures from managers.

Moving forward

So far, 2020 has been extremely challenging for investors of all types, and undoubtedly there is more volatility and upheaval in store as the true nature of the economic impact of COVID-19 becomes clearer.

While such periods are uncomfortable, they are also crucially informative for investors seeking to understand the diversification and resilience of portfolios, the discipline and skill of asset managers, and the weak points in risk management capabilities or processes.