Investment Pros Seek Diversification, Low-Risk Assets Ahead of Uncertain 2024

Investment professionals will be preparing portfolios in 2024 for risks from geopolitical conflict and economic slowdown, seeking more exposure to low-risk assets while diversifying holdings, a recent survey disclosed.

Around half the respondents expected a mild economic contraction over the next year, with 52% saying they had raised the duration of their bond holdings in response to this. Nearly one in three expected to increase their stake in U.S. credit over the coming year, according to the 2023 Asset Allocation Survey from the MFS Investment Solutions group.

The survey asked about trends that asset managers looked to follow in the coming years, with 28% responding that they intended to decrease their investments in limited-maturity fixed income investments, showing that some were ready to move cash into the market.

“Recent actions taken to de-risk portfolios are understandable as we believe the full effects of higher interest rates have yet to be felt,” Jonathan Barry, managing director at MFS, said. “That said, higher rates make fixed income more attractive now, and our survey shows that investors see opportunities across a number of asset classes.”

Investment Managers Bypassing Large-Cap Stocks, Looking at Private Equity

Investment managers will likely be looking at small-cap and mid-cap stocks for growth, with 60% believing they will outperform large-cap stocks over the next one to three years. Respondents see the best results from small-cap stocks, with 43% looking to increase their investments in this class of equities, while 28% would look to add midcap stocks to portfolios under management.

Over the next year, nearly one in five investment managers will look to decrease their holdings of large-cap stocks, while an additional 37% said they would expand investments into international stock markets. Twenty-seven percent more said they would expand their emerging market equities portfolio. 

Managers also are looking beyond equities markets to other asset classes, with nearly one-in-four looking to increase investment in infrastructure projects, while about 20% said they were seeking to boost their exposure to private equity and debt. 

“Being mindful of risks and valuations while seeking portfolio diversification makes sense at this stage of the cycle,” Barry said.?

To respond to the complex market environment, 32% of respondents said they are expanding their use of active strategies, while 62% more will maintain exposure to active management.