David Riley, chief investment strategist at BlueBay Asset Management, discusses how the year is shaping up from the buy-side perspective, and the key topics on investors’ minds
This article was produced by ELITE Connect and originally published on the ELITE Connect platform
What are the key issues affecting the buy side right now?
David Riley: A key challenge facing the buy side is to provide solutions that meet investors’ risk-and-return profile during the transition to a post-quantitative easing (QE) investment regime characterized by greater market volatility and dispersion in asset performance.
Investment inflows into passive, momentum and ‘quant-driven’ vehicles incentivized by the search for income in a world of zero – and even negative – interest rates have rendered financial markets more fragile as recently illustrated by the sell-off in equity markets and losses on volatility-related investment products.
Investors are beginning to recognize that the shift in investment regime favors active investment of a broader range of risk premia to supplement QE-diminished future market returns. The challenge for the buy side is to develop alternative investment solutions that will generate attractive risk-adjusted returns to end-investors that can perform in more volatile and two-way markets.
Is there one overriding topic?
DR: A key topic for end-investors is enhancing the quality and timeliness of information across all aspects of the investment process to clients. Investors are rightly demanding greater transparency from the buy side and this is also reflected in new regulations, notably Mifid II.
The regulatory regime and financial relationship between the UK and the EU post-Brexit is also a continuing focus. As active managers of fixed income investments, a key focus is the outlook for inflation. After a long period of persistently low inflation and recurring fears of deflation, particularly in the euro area, inflation is back. The question is how far and how fast inflation will rise in light of the still powerful disinflationary forces of technology and globalization.
Are there any issues on the horizon you are keeping in mind?
DR: After almost a decade of being suppressed by central bank QE, we are focused on the return of two-way risk and volatility in government bond markets and the implications of a move toward more ‘normal’ monetary policy settings for all financial – and real – assets.
In the world’s most important economy, the transition to the post-QE era is further complicated by debt-funded tax cuts and government spending at a time when the US is already at full employment, raising market fears of higher inflation and a more aggressive interest rate stance by the Federal Reserve.
Meanwhile, the European Central Bank is scaling back its bond purchases and will be raising interest rates in 2019. Monetary policy may also be tightened in Japan. Active management of market, interest rate and liquidity risk are absolutely essential at this inflection point in global monetary policy and investment regime.
What can IR departments do to help you deal with these issues more effectively?
DR: IR teams are important from an investor perspective around transparency, managing expectations and proactively engaging with both equity and bond investors. ESG is a much more important feature of investors’ broader risk management. Effective IR teams can help us as investors better understand the reputational, conduct and environmental risk faced by a company and how management is managing these risks.
Is there anything else we should be aware of?
DR: We’re experiencing increasingly strong demand for ESG considerations when investing. Demand from investors, such as pensions funds, is for asset managers to integrate ESG into their screening processes when selecting stocks or bonds for investment. Some more sophisticated investors are seeking dedicated investment strategies, whereas others are looking for ESG to be more of an overarching consideration in the investment process. For IR departments, being able to support the growth of this trend is important for asset managers.