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Stagflation Now Firmly In Asset Managers’ Focus

International | Mar 23 2022

In anticipation of worsening market conditions, a range of inflation protection and diversification strategies were recently implemented by asset managers.

-Six out of ten fund managers now forecast stagflation
-Cash levels high and growth optimism low
-Bank of America remains bearish
-Record allocation to commodities
-Several inflation protection and diversification strategies

By Mark Woodruff

A growing unease about market volatility and the impact of rising inflation in the final quarter of 2021 led investors to focus on strategies that offered both income and inflation protection.

It seems concerns were well founded as six out of ten fund managers now forecast stagflation, according to the March global fund manager survey conducted by Bank of America.

The survey indicated cash levels are at their highest since the early stages of covid in April 2020, and global growth optimism is at its lowest since July 2008 at the height of the subprime mortgage crisis in 2008.

While equity allocations are down, they have not reached the capitulation levels Bank of America awaits, along with a bias toward policy easing, before changing its cyclically bearish stance.

The allocation to global equities has slumped to its lowest level since May 2020, but investors are very underweight bonds, not stocks, points out the investment bank.

Meanwhile, the top crowded trade is long oil/commodities, with the allocation to commodities rising to a record 33%, according to the survey.

Strategies in anticipation of inflation 

As a result of a focus upon inflation protection strategies towards the end of last year, investor resources were directed to Private Debt, Infrastructure and Real Estate, noted consulting firm bfinance in its quarterly sector analysis 'Market Intelligence and Market Trends'.

According to the February industry update, attention turned toward higher-yielding securities, such as emerging markets debt and US corporate high yield bonds, as interest in investment grade bonds continued to wane. Strategies with a focus on shorter duration, higher quality assets were particularly popular, noted the consultant.

Also, bfinance pointed to a resurgence of investor interest in diversification, as shown by the allocation of funds to a wide range of multi-sector fixed income strategies. In addition, leveraged loan strategies were sought to protect portfolios from rising inflation.

Leveraged loans (also known as bank loans) usually are the most senior debt obligations of non-investment grade corporate borrowers. Compared to most high yield corporate bonds, loans typically are secured by assets of the borrower, and they are floating rate instruments that have interest rate resets every one to three months.

bfinance reports European and North American clients were actively seeking multi-strategy hedge-funds-managed futures funds, and equity market-neutral strategies. It’s felt this demand arose from a need to diversify equity risk and the broad appeal of a stronger performance across hedge funds and liquid alternatives.

Private markets

While the majority of Private Market interest was for Real Estate and Infrastructure last year, bfinance also noted interest among its clients in Private Debt.

Private Debt incorporates a wide range of debt strategies and niche asset classes, including corporate debt, which garners the most funds. Within corporate debt, direct lending accounted for two thirds of all capital raised, according to the consultant.

Private Debt also includes alternative finance, which incorporates trade finance, equipment leasing and maritime finance.

Inflation in developed markets also led to heightened interest in Real Estate, pointed out bfinance. This interest especially centred upon more niche categories, such as social housing and life sciences research facilities.

Overall, Real Estate in the US delivered its strongest recorded return (around 23%) in 2021 since the market institutionalised in the 1970s. 

This performance was due to historically high levels of transaction activity as investors sought refuge from high inflation, suggested bfinance. Meanwhile, strong capital returns in the UK resulted in an overall return of 16.5%.

Turning to Infrastructure, demand was strong for timberland investments, which relates to ownership of productive forest lands, explained the consultant.

Unlike the other private asset classes, infrastructure fundraising was concentrated on Europe, which represented 60% of the total, while the US represented just 20%.

Finally, one of the main attractions last year of Private Equity for investors, according to bfinance, was to diversify exposure toward regional developed and emerging markets, primarily in the Asia-Pacific region

The US dominated as the main geographic area of focus for Private Equity, attracting two-thirds of the available capital.


For 2022, bfinance believes demand for liquid alternatives will remain buoyant in the same areas that investors focused on last year.  In addition, there’s expected to be a potential recovery of interest in alternative risk premia (ARP) strategies for more fee-constrained investors.

ARP strategies aim to achieve excess returns from exposure to specific risk factors or returns from behavioural or structural market anomalies.

Last year, the performance of ARP strategies was driven primarily by trends, largely in equities and commodities, and the recovery in Value for single-name stocks.

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