New analysis from Asset Risk Consultants (ARC) shows many of the best performing private clients’ portfolios underperformed their peers in the first quarter as performance swung in favour of portfolios with a value bias amid higher-than-expected interest rates and rising inflation.
Graham Harrison, managing director at ARC, says: “The easy money has been made. We are at an inflection point for financial markets and investment strategies. The next decade will be significantly different for investors than it has been during the past three.”
Key points:
· Average private client portfolio down by 4.1 per cent in the first quarter of 2022*.
· C26 per cent of portfolios slipped to the bottom quartile from the top quartile during Q1*.
· C30 per cent of portfolios rose to the top quartile from the bottom quartile during Q1*.
· Growth bias portfolios hit as value stocks outperform growth stocks by 9 percentage points.
· Figures based on the actual performance of 300,000 portfolios managed by 100+ managers.
According to ARC’s latest data released today, the average return of the ARC Sterling Steady Growth Index (based on the most common risk profile run by discretionary investment managers), for the first three months of the year was -4.1 per cent.
ARC collects the actual performance of more than 300,000 investment portfolios from more than 100 investment managers and a steady growth portfolio typically has around two-thirds of exposure to equities with the remainder in other asset classes such as bonds.
However, the data shows the changing economic landscape has had a significant impact on managers whose strategies were previously based on a low inflation and a low interest rate environment. The investment consultancy says strategies that favoured growth stocks, small caps and long-dated bonds suffered the most. Subsequently, its data shows that more portfolios jumped more than one quartile than would typically be expected in any given quarter.
Around 30 per cent of managers in the Steady Growth sector with a value bias leapt from the fourth quartile at the end of 2021 straight into the top quartile in the first quarter of 2022, while 26 per cent of previously top-quartile managers with a growth bias dropped into the fourth quartile for the first three months of the year.
Harrison adds: “Multi-asset class managers found the first quarter of 2022 very challenging. The proximate cause is the invasion of Ukraine by Russia which has wide-reaching and long-term geopolitical implications. But there is a long list of pre-existing contributory factors: a populist trend toward more protectionism; supply chain shortages caused by COVID; a decade long lack of real wage growth; and a perception on both a national and global scale of a widening inequality of wealth
“Despite the reversal in leaders and laggards comparing Q1 2022 with Q4 2021, over longer periods there remains little evidence that seeking to time switches between discretionary managers based on philosophy and style makes sense. However, an understanding of your manager’s investment philosophy and process is paramount. With the end of easy money, the search for manager skill will become ever more important and alpha strategies will once again come into vogue.”
Risk Relative to World Equities Returns for 3 months to March 2022 GBP USD EUR
ARC Cautious PCI 0% – 40% (2.6) (4.5) (4.0)
ARC Balanced Asset PCI 40% – 60% (3.4) (5.5) (4.8)
ARC Steady Growth PCI 60% – 80% (4.1) (6.1) (5.6)
ARC Equity Risk PCI 80% – 110% (4.9) (7.1) (6.0)
Risk Relative to World Equities Returns for 12 months to March 2022 GBP USD EUR
ARC Cautious PCI 0% – 40% 1.6 (1.7) (0.1)
ARC Balanced Asset PCI 40% – 60% 3.5 0.2 1.9
ARC Steady Growth PCI 60% – 80% 4.6 2.0 5.0
ARC Equity Risk PCI 80% – 110% 4.8 1.8 7.1
Risk Relative to World Equities Returns for 24 months to March 2022 GBP USD EUR
ARC Cautious PCI 0% – 40% 13.1 10.7 12.4
ARC Balanced Asset PCI 40% – 60% 21.9 24.4 22.1
ARC Steady Growth PCI 60% – 80% 29.3 36.4 35.3
ARC Equity Risk PCI 80% – 110% 36.7 46.2 47.2
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