The ‘great rotation’ hypothesis is flawed, two large fund managers this week suggested, because long-term institutional flows do not support it.
Rallying equity markets recently could be little more than a continuation of the risk-on/risk-off trade pattern, which has seen investors periodically dip into risk assets before retreating again.
Axa Investment Managers (Axa IM) and Legal & General Investment Management (LGIM) labeled the accelerated move into equity investment as a “trade rotation” and a “slow rotation”, respectively.
Both managers note, in separate analysis, that pension funds have not altered their long-term allocations away from other assets, including bonds, into equities, and that the equity inflows that have occurred have come from cash rather than bonds.
Mathieu L’Hoir, senior equity strategist at Axa IM, says: “Current market movements point to investor rebalancing of a tactical, rather than strategic, nature.”
Lars Kreckel, equity strategist at LGIM, says that though it is tempting to anticipate a reversal from fixed income into equities – and a decade-long tailwind for equities as a result – “closer inspection reveals the conditions that caused funds to flow into bonds have not changed”.
L’Hoir says signs such as declining risk aversion and rebounding economic activity does bode well for equity returns, but that similar conditions existed in 2009 without triggering a corresponding great rotation.
He notes that institutional investors, for the most part, are primarily focused on capital preservation, while Kreckel points out that long-term allocations by pension funds to alternative assets, like private equity, have been more significant in recent years.
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