However, the history of fund management groups offering new solutions is often treated with suspicion by investors, as it generally comes with a higher price tag.
“Some of the communities of fund selectors are very conservative. Luckily, we didn’t suffer this condition with the clients we have. We had one client that had offices around the world and so understood there are different approaches to running money.”
The second trend at the moment is a dichotomy. As mentioned already, investors are increasingly unhappy about the low level of returns from traditional fixed income, but they are also nervous about going heavily into equities. That leaves an obvious product type: new fixed income products.
Alternative fix
Favaloro’s experience is that in this new environment, most clients have no preconceived idea what they are looking for. “Some of the more sophisticated clients might, but the large majority come with an open mind. One thing that is clear is they are not ready to go into equity.
“In the wholesale area they are intermediaries and they have trouble talking to the end client who won’t accept the volatility of equities.
“In the institutional environment, our client base is very traditional in the way they look at investments, and equity investment carries too high a risk.”
Developed market government bonds and investment grade credit no longer deliver what is needed. There is a shift towards high yield and alternative credit and, of course, emerging credit.
“The concern clients have with emerging markets is that the macro view has a certain time frame but the markets have a much shorter one.” And that difference can cause the volatility they are trying to avoid.
“However, we are looking at the concept of multi-asset brought into the fixed income and credit area – a multi-fixed income strategy. There is already growing demand for that.
“All of this comes back to one core problem: how much volatility are clients willing to suffer to sustain their return expectations?”
Palatable equities
One solution is to somehow make equities more acceptable to most investors. “But how do you overcome the reluctance to go into equities and at the same time allow investors to have exposure to an underpriced asset class?”
Generali’s solution is to create volatility controlled equity funds. “Not low volatility, just volatility controlled,” says Favaloro. “The idea is that it allows an exposure to equity without the spikes in volatility.
“The product came out of our insurance expertise, where we had to create equity portfolios under Solvency II constraints. If we keep the volatility down, it reduces the amount of capital we have to hold.”
