WTW Urges Investors to Focus on Diversifying

WTW has called for investors to concentrate on thoughtful diversification, evaluating active strategies and good governance in 2024.

The insurance services provider said its research showed that, while clients are focused on these areas, most plan to focus on asset allocation, equities, and fixed income in 2024.

It said its findings indicated that the top four long-term priorities that clients are focused on include macroeconomic conditions, fees, organizational design/governance, and geopolitics.

Fixed income

WTW said it predicts interest rate volatility will fall in 2024, which should be supportive of broader fixed-income returns due to the starting level of all in yields.

The firm anticipated the best way for investors to maximize their chance of success in a time of macroeconomic uncertainty, where a stable return stream is increasingly valuable, was to diversify with downside mitigation and uncorrelated sources of income.

It said higher carry, medium-duration strategies, where sensitivity to interest rate movements is moderate and starting yields are elevated looked “especially attractive”.

Private debt has also continued to offer meaningful return pickup and strong value for risk taken and WTW said the most attractive opportunities in the market are available when managers are able to exploit the full breadth of markets and flex capital toward areas with the most attractive risk-adjusted returns.

It said: “As we observe an elevated level of starting yields, average corporate spreads, and modest default expectations, we believe that income will be the primary component of credit returns looking forward.”

Active management

The firm said the high inflation rates and slowing economy of 2023 have created stock market winners and losers, creating an environment where skilled active managers can search for companies that can navigate a tricky environment.

Over the past decade, global equity markets have experienced significant concentration. The MSCI World Index's largest stock holdings outstrip the largest country allocations outside of the US, including three of the world's largest 10 economies.

As a result, proficient asset managers who successfully navigate the risk of a reversal in those concentrated names will be crucial for investors in 2024.

Additionally, the growth in opportunities for active managers to thrive has also created opportunities in the hedge fund space, which usually experiences strong returns in times of higher macro volatility and asset class return dispersion.

WTW said investors considering hedge funds will need to focus on a total portfolio and select uncorrelated diversifying alpha sources through careful selection of highest conviction strategies and managers.

Governance

Alongside the rapidly changing market landscape, new regulations will require increasing action and dynamism from asset managers.

Regulations such as the Setting Every Community Up for Retirement Enhancement 2.0 Retirement Savings Act (SECURE 2.0 Act), which aims to encourage more people to save for retirement, include new rules around outsourcing.

WTW said:  “While asset owners can certainly outsource most everything if they want to, they can also delegate a single asset class or specific operational functions.”

It cited the 2023 ai-CIO Outsourced Chief Investment Officer Survey, which found that over 60% of asset owners with $1 billion or less in assets delegate or plan to delegate at least a portion of their assets. Of those, about 55% use or plan to use full delegation, while the other 45% use or plan to use partial delegation.

The firm also predicted that Pooled Employer Plan (PEP) solutions will “completely change the dynamics” of the US DC landscape due to their potential to reduce plan costs, reduce administrative effort, reduce fiduciary risk, and improve participant outcomes.