BlueBay AM: Private markets demand boom overblown according to wholesale investors

November 28, 2022

International wholesale investors do not expect to increase their allocation to private markets significantly from current levels, and remain positive about the case for public markets, despite recent global economic headwinds. This is according to the results of a survey¹ of 800 European and US fund buyers, consultants, and wealth managers, commissioned by RBC BlueBay Asset Management (“RBC BlueBay”).

Respondents are currently allocating 22% of their portfolios to private markets, and do not expect to significantly increase this allocation over the next three to five years. Whilst just over half of respondents expect public markets to outperform private markets over the next 5-10 years.

Asked for their views on how current market volatility will affect the investment case for public equities and fixed income, 46% of intermediary investors argue that it hasn’t changed the case for investing in public markets, with the remaining respondents split in equal measure between supporters and detractors.

The case for public markets is further reinforced by respondents’ asset allocation priorities over the next three years. In fact, equities and fixed income remain the primary allocation choices for 31% and 26% of respondents respectively, ahead of other asset classes. With the preferred approach by the majority of respondents (77%) being active over passive.

Nevertheless, half of respondents agree that investors will struggle with returns due to inflation for at least the next three years - US wholesale investors are the most pessimistic of all regions with 59% expecting a drag on returns over 5 years. Most international wholesale investors (39%) expect portfolio returns to hover in the 5-6% over the next 3-5 years.

Other findings include:

• Equity future fund selection: Appetite for value stocks is increasing, with 28% of wholesale investors currently allocating to this style, and 33% expecting to allocate to it over the next 1-3 years. There also appears to be a preference for large cap stocks versus small and mid cap (SMID), with 42% of wholesale investors planning to allocate to large caps over the next 1-3 years, versus 25% for small, and 33% for SMID.
• Equity rally outlook: Wholesale investors expect North America (25%) and China (27%) to record the biggest equity rally over the next five years, albeit there are signs of a shift towards Europe.
• Fixed income: Absolute return is the preferred style of fixed income investing by over a third (37%) of respondents, especially among UK-based investors (47%).
• Emerging markets (EM): An overwhelming majority (86%) of wholesale investors believe emerging markets are poised for growth. With 58% of respondents stating they are looking to capitalize on this growth story. China is largely separate from EM allocations; and more respondents this year (41%) see China as the most investable EM country when compared to 2021 findings (36%).
• ESG: A majority of investors (57%) regard ESG as an important consideration. This is higher amongst US respondents (68%), with the Russian invasion of Ukraine having a had great deal of influence in driving greater interest in ESG factors. Concerns around supply chains as a result of the Russian invasion of Ukraine is the biggest driver of greater interest in ESG amongst international wholesale investors (68%) followed by reducing dependence on Russian oil and gas (45%).

Commenting on the research findings, Anthony Pickering, Head of Business Development at RBC BlueBay Asset Management said, “Against a backdrop of heightened volatility, our research suggests that a majority of wholesale investors continue to favour active management, seeking greater flexibility in portfolios as they navigate these uncertain times. The research also suggests the much-anticipated boom in private markets allocations may well play out more slowly than expected, as investors first seek to address portfolio imbalances caused by market re-pricings through allocations towards public markets.”