“Cash is King” reads the headline from last year’s Canadian asset and wealth manager survey conducted by RBC I&TS during the initial months of the pandemic. Less than a year later, net investor demand* for cash, regardless of location, is at or near the bottom among the various asset types, replaced by alternatives and exchange-traded funds (ETFs) as managers move away from cash and traditional fixed income investments in an environment of persistently low interest rates, ongoing market volatility and rallying public equity markets.
At the macro level, there is general agreement on high-level net investor demand globally (see graph). However, regional differences begin to emerge at the micro level:
- For UK and European respondents, infrastructure has the highest net investor demand, followed by private equity and ETFs; cash and fixed income have the lowest demand
- ETFs are in top spot among Canadian managers, followed by infrastructure and private equity; fixed income and commodities have the lowest net investor demand
- Demand for equity investments ranks in sixth spot globally and across all geographies
- UK and European managers are more bullish than Canadians for all asset types except cash
- Alternatives and ETFs
are expected to have the highest net demand - Fixed income and cash
are expected to have the lowest net demand
Net Investor Demand by Asset Type*
Higher Demand minus Lower Demand
No Longer on the Fringe
The evidence is mounting that alternative investments are fast becoming mainstream. A recent survey by J.P.Morgan Asset Management1 indicates that almost 88% of survey respondents, primarily institutional investors, use alternatives and nearly half (47%) cite “alpha, income and diversification” as their reasons for doing so. Where investors made a single choice, “diversification” was the dominant choice, likely due to the stretched valuations in traditional public equities and fixed income. Income was not a key reason for holding alternative assets among this group but, according to the survey report, this is expected to change as investors facing low bond yields explore other avenues to generate income, “notably in core real assets and alternative credit, where income and diversification are intertwined.”
1. Infrastructure
According to the RBC I&TS manager survey, infrastructure investments have the highest net investor demand in the UK/Europe and are #2 in Canada. In the midst of COVID-19, economic growth is the primary driver for governments across the globe to promote infrastructure projects, ranging from traditional highway, bridge and airport upgrades to telecommunications and sustainability initiatives. And perhaps for good reason. The International Monetary Fund reports that an increase in public investment by 1% of GDP across advanced and emerging economies would create 20 million to 33 million jobs, lifting GDP by 0.25% to 0.5% in the first year, and up to four times more after the second year.2 Low interest rates enable governments to finance these large investments.
The private investor also appears to be showing increased enthusiasm for infrastructure investments, particularly digital and renewable assets that tend to be more profitable and less reliant on the vagaries of government support.3
2. Private Equity
Net investor demand for non-listed, private equity assets is particularly high among UK and European respondents based on the RBC I&TS survey (#2 and one spot ahead of Canada). Governments in this part of the world are supporting emerging businesses through post-pandemic recovery initiatives and fund managers are including private equity options within their retail product offering, driven by tax incentives for individual investors. Private equity also provides opportunity to help meet the growing demand to incorporate ESG factors into institutional and retail investments (see side bar).
3. Private Debt
With bond returns linked to persistently low interest rates, it would appear that managers are looking to boost fixed income yields through private debt, which is in bullish territory based on net investor demand, ranking #4 overall based on the RBC I&TS manager survey. In Canada, for example, the central bank is expected to hold its key interest rate at 0.25% until economic slack is absorbed and, as a result, bond returns are likely to remain flat. In response, Canadian pension funds are able to leverage their in-house expertise and flexibility as lenders to obtain significant returns on private debt investments. Opportunities in corporate credit are also growing as more industries recover from the economic impact of the coronavirus pandemic.4
4. Real Estate
Net investor demand for real estate is at the lower end of the bullish spectrum. COVID-19 appears to be accelerating change across the real estate market as retail properties experience disruption, remote working creates uncertainty around office buildings and e-commerce brightens the outlook for industrial real estate.
Viewing alternatives as mainstream
In Support of Private Equity
“As the French and European governments look to support start-ups and tech companies as part of their post-pandemic economic programs, including tax advantages for retail investors, there are significant opportunities to promote private equity. Life insurance companies are including private equity in their financial products for the retail market and, as institutional and retail investors seek ESG in their investments, private equity has the potential to provide value for this approach as well.”
- Philippe Legrand, Country Head, France, RBC I&TS
Surging ETFs
ETFs have the highest net investor demand in Canada and are #3 among UK/European respondents. Canadian ETFs amassed CAD 29.7 billion of inflows during the first half of 2021—35% higher than the previous half-year record, which was set last year. As of late June 2021, ETFs in Canada were valued at CAD 286 billion, a significant increase from CAD 30 billion at the time of their infancy 11 years ago.5
Similarly, investor appetite for ETFs globally has shown no sign of slowing in the past year despite uncertainty caused by COVID-19, with ETF assets surging to USD 7.6 trillion during this time based on another J.P.Morgan Asset Management survey,6 which indicated that:
- Strong liquidity provided by ETFs during the pandemic-related volatility of 2020 has resulted in a sharp increase in the proportion of respondents who view liquidity as an advantage of ETFs
- Respondents increasingly recognize the ability of ETFs to provide liquid, cost-effective access to diversified bond portfolios; fixed income ETFs are now the second-largest ETF asset class, behind equity ETFs
- Active ETFs remain a relatively small segment of the ETF market but the proportion of respondents with active ETF exposure increased to 54% from 31% in 2020, reflecting a desire to boost portfolio diversification and alpha potential, and reduce the cost of active investing
- Positions in thematic funds have grown significantly since 2020 and are set to increase further as respondents move assets into technology and environmental themes
- Boosted by record inflows, ESG assets more than tripled in 2020 to USD 174 billion and are set to rise further; a lack of consistency in ESG metrics continues to make fund comparisons difficult
Rising prominence of active ETFs
Cash ≠ King
As mentioned, RBC I&TS’ 2020 survey of Canadian asset and wealth managers, conducted in June, indicated that net investor demand for cash was at the top of the list among the various asset types as the stock market had dropped and investors were looking for a safe haven. Fast-forward 10 months and the popularity of cash has fallen significantly to #7 spot in Canada (only higher than hedge funds, commodities and fixed income) and last place in the UK/Europe. This has been accompanied by a dramatic stock market rebound (see graph) as investors regained confidence in the equity markets and redeployed their idle cash.
Global stock markets have rebounded significantly from pandemic lows
Looking for a Substitute
Respondents’ bearish view of fixed income is confirmed by Vivien Lee, Senior Economic Research Analyst at RBC Global Asset Management: “From a long-term perspective, low government bond yields have been a challenge, particularly for liability-driven investors, due to a combination of low returns and lower discount rates resulting in higher liabilities,” says Lee. “Pension funds and insurance companies have, over the years, shifted away from fixed income and searched for substitutes. Recently, demand for bonds has also been dampened by expectations of higher inflation, as well as the prospect of Fed tapers and interest rate hikes.”
What we've seen is a breakdown of the 60-40 (equity-fixed income) portfolio. This just doesn't work any longer, as advisors are looking for alternative solutions without substantially increasing risk and volatility.
- Jerry Thomas, Senior Vice-President, Wealth Strategy and Advisor Consulting, Wellington-Altus Private Wealth, Canada
Low-correlation asset classes are becoming more and more accepted. If you move up to the UHNWI (Ultra-High-Net-Worth Individual) space, for example, we are seeing a much higher uptake on alternative funds today than 10 or 15 years ago to help enhance portfolios.
- Anthony Messina, President, Guardian Partners Inc., Canada
When we look at one of the main focus areas for modernization of our asset management business, it's an overall larger allocation to alternative investments.
- Damon Sutherland, Senior Vice-President, Sales and Wealth Services, CI Assante Private Client, Canada
Our clients have a significant appetite for alternative investments and yield-oriented strategies, given the current low interest rate environment.
- Jim Bantis, Executive Vice-President, Client Wealth Management, Gluskin Sheff + Associates Inc., Canada
* The proportion of respondents expecting higher demand for a particular asset type minus the proportion expecting lower demand for this type
1 J.P.Morgan Asset Management, Global Long-term Capital Market Assumptions Client Survey, November 2020
2 The Economist, Is an Infrastructure Boom in the Works, January 2, 2021
3 Ibid
4 Benefits Canada, How Canada’s Pension Funds are Maximizing Fixed Income in a Low Interest Rate Environment, June 30, 2021
5 Canadian ETF Association and National Bank of Canada, Canadian ETF Flows, June 2021
6 J.P.Morgan Asset Management, TrackInsight Global ETF Survey 2021
