The year 2023 is likely to see some major shifts in financial investment trends and the investment management landscape. With high inflation, rising rates, increased market volatility and an economic downturn, passive investing strategies are coming under pressure. At the same time, there is likely to be a resurgence of active management as the ability to outperform benchmark indices becomes more valuable. Investors are also expected to continue shifting more assets towards alternative investment strategies in search of diversification, inflation protection and absolute returns.
The return of active investment management
The decades-long shift from active to passive management has slowed down significantly. In the current environment, passive strategies tracking market capitalization-weighted indices are struggling. The ability to maneuver, be selective and even time the market is becoming more valuable again. According to BlackRock’s 2022 Global Institutional Recession Survey, 57% of institutional investors plan to increase their allocations to active strategies over the next 12 months. Key drivers include inflation protection, drawdown mitigation and absolute returns. The shift is also evident in mutual fund flows, which turned positive for active funds in 2022 after years of consistent outflows.
The shift towards alternative investments
Alternatives like hedge funds, private equity, venture capital, real assets and structured products have seen tremendous asset inflows in recent years. While past performance won’t guarantee future returns, many institutions and high-net-worth individuals believe alts can enhance portfolio efficiency and diversification. The recent poor performance of public markets is also driving investors towards the return profiles and inflation sensitivity offered by alternatives. However, investor awareness of the complexities, illiquidity risks, high costs and skill requirements of alts needs to improve.
The growth of model portfolios
Increasingly, investment managers are making use of multi-asset, factor-based and thematic model portfolios tailored to specific outcomes, risk profiles or values. These customized portfolio solutions are expected to keep gaining traction with investors looking to simplify implementation and rebalancing. Model portfolios also enable improved customization for goals ranging from income, to capital preservation or growth.
The focus on environmental and social goals
Sustainable investing strategies that integrate environmental, social responsibility and governance (ESG) factors are entering the mainstream. Younger investors in particular increasingly expect their investments to align with their values. This will drive further product innovation in areas like green bonds, community finance, gender lens investing and funds targeting specific SDGs.
2023 is likely to mark a notable shift towards active management, alternatives, customization, and sustainable investing in response to a complex, volatile market environment. Success will require understanding these shifts and adopting an investor-centric approach focused on portfolio construction and risk-adjusted returns rather than chasing benchmarks.