By Ben Simmons

Investment professionals have noted an increased focus on income among clients across most asset classes, according to a recent survey conducted by Aviva Investors’ multi-manager team.

The survey asked fund managers based in the UK, US, Europe, Asia and Latin America for their views on the macro-economic environment, return expectations and client behaviour in 2012.

The results show that 83% of real estate managers believe clients are more focused on income today than they were previously, followed by 71% of equity and 67% of fixed income managers. Hedge fund managers were an exception, with only 9% citing an increased focus on income by their clients.

Nick Mansley, global director of multi manager at Aviva Investors, commented on the findings: “In an environment of low cash yields and continued uncertainty around economic growth it is not surprising that investors are more focused on income. We expect this to be a long lasting theme across several asset classes. Unsurprisingly, hedge fund clients are not particularly worried about income, but more real estate managers are seeing this shift than we expected.

“The fact that equity investors are seeing more of an increased focus on income and are more concerned about inflation than fixed income managers turns the world of investment on its head, and may reflect the broader uncertainty in markets at this point in time.”
Return expectations

Looking at return expectations for each asset class in 2012, the survey highlighted that:

• Equity managers are the most optimistic about returns for their asset class. The majority (64%) expect returns in excess of 5% this year and only 3% expect negative returns.

• In contrast, only 7% of fixed income managers expect returns of more than 5% from sovereign bonds in 2012. A notable 20% even expect negative returns from sovereign bonds (13% expect negative returns for corporate bonds respectively).

• Of those hedge fund managers expressing a view on overall hedge fund returns, the expectation is for returns between 5% and 15%. Among private equity managers, views were split between those expecting roughly similar returns to the last five years, those expecting higher returns and those expecting lower returns.

• Real estate managers also had mixed outlooks, with the majority expecting capital returns between 0% and 10%. A further 17% expect capital value falls and 14% expect capital growth of more than 10%.

Nick Mansley comments: “While equities might normally be expected to deliver higher returns, given the current market conditions the optimism — or lack of pessimism — of equity managers unveiled by our survey is somewhat surprising. The fact that some fixed income managers are actually expecting negative returns is perhaps less surprising given the levels that yields have reached in some markets but is a negative indicator for the prospects for the asset class. Finally, among both real estate and private equity managers, there is a broad range of views that may reflect the variation in market conditions around the world.”

In addition, the survey revealed the following asset class specific results:

Equity manager views
• Only 17% of equity managers expect more Initial Public Offering (IPOs) in 2012 in comparison to 2011.

• With regards to the biggest risk currently facing equities, more than 70% of managers said this was the Eurozone. Investor appetite for equities was seen as the biggest risk by only 23% and none cited valuations. In fact, an increased focus on equity valuations relative to bonds was seen as the biggest opportunity for equity investors in 2012 by 58% of managers.

• Most managers cited demand/decreasing consumer spending as the biggest challenge for companies in 2012 (41%), although 31% cited a lack of liquidity/funding from banks. A further 19% pointed to the government’s continued commitment to austerity measures.

• Almost none of the respondents were overweight financials at the time of the survey. In fact, 44% were underweight in this sector, which indicates that just over half of equity managers held index weights. Sector overweights included technology (40%) and healthcare (37%). In considering financials for 2012, only 17% expect to increase allocations to the sector, although this is the sector with the most positive net balance.

Fixed Income manager views
• Nearly half of fixed income managers (46%) expect the average duration of paper they invest in to shorten in 2012.

• Lack of liquidity is seen as the biggest risk currently facing corporate bonds by more than 70% of managers. In comparison, only one in five are concerned about the impact of rising interest rates on corporate bonds and just 8% worry about rising rates with regards to sovereign bonds. The main concern regarding the latter is around sovereign default or restructuring (62%).

• Half of the surveyed managers expect investors to increase allocations into corporate bonds in 2012 while only one fifth believe this will be the case for sovereign bonds.

• Furthermore, just over a third of fixed income managers (36%) are concerned about the impact of deflation on their investment strategy - compared to 26% of equity managers. In turn, slightly more equity than fixed income managers are worried about inflation in the medium to long-term (43% vs 39%).

Real estate manager views
• Market/economic conditions were cited as the greatest challenge currently facing real estate by the majority of managers (60%).

• In response to which region of the world is currently most over-hyped, one third of managers said Continental Europe and Emerging Markets offer relatively poor returns in relation to risk.

• More than 70% of managers stated that global diversification is an important means to generate returns and/or reduce risk. A majority of those also said clients were interested in investing globally or internationally.

Hedge fund manager views
• In responding to views on regulation, twice as many hedge fund managers (67%) believe that the Alternative Investment Fund Managers Directive (AIFMD) will have a positive rather than a negative impact, in terms of transparency and costs. This makes hedge fund managers markedly more positive on the AIFMD than private equity managers — see below.

• The surveyed managers were evenly split in their views on inflation and deflation. More than one third of those surveyed (35%) stated that inflation pressures will remain a concern over the medium to long term, while the same amount of respondents thought deflationary pressures to be a greater concern than inflation.

Private equity manager views
• Almost 60% of private equity respondents believe that the impact of current market/economic conditions is the biggest risk facing their sector in 2012.

• More than 85% further believe that private equity firms should not look to list in 2012 because it creates too much short term pressure and the value of private equity firms is not well understood.

• In terms of buy-out activity, less than 12% of respondents believe that there will be a significant increase in 2012, and almost a quarter think there will be a drop in buy-out activity.

• Finally, with regards to the AIFMD, 42% of private equity manages believe it will stifle growth and lead to higher costs, while only 7% stated it will have a positive role in creating greater transparency in private equity.

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