At the beginning of each year the multi-manager team at Aviva Investors canvasses the thoughts of external managers by way of an online survey.
As time has progressed, this has really gained traction and we received more than 75 responses this year from managers managing assets of more than £5trn. We focused on both the equity and fixed income asset classes and received some very interesting responses in aggregate.
Focusing on equity responses first, it is clear that managers are far more valuation aware than they were in previous surveys with almost a third of them seeing valuations as the biggest risk to equities.
This compares to less than 10 per cent in 2013. The biggest perceived risk to equities was actually macroeconomic uncertainty at 35 per cent.
Almost two thirds of managers expect an acceleration of flows into equity markets while less than a tenth expect a deceleration. There was also a complete turnaround on the view of the eurozone troubles compared with last year with 74 per cent expecting no negative impact from the issues this year compared with 71 per cent who did expect a negative impact in 2013.
Managers have been consistent with regards to initial public offering activity – expecting it to grow this year. The vast majority of respondents expect progress to be driven by top line growth rather than margin improvement or re-rating.
Mid-cap stocks are expected to be the best-performing segment this year but not by a huge margin compared with large-cap stocks. The financial sector is expected to be the best performer by the outright majority of respondents.
Finally, returns were most likely to be between 6 per cent and 10 per cent for all equity regions. As is evident, in very broad terms the equity managers are optimistic on their asset class which is pleasing as our portfolios continue to be overweight equities with a bias towards developed markets and away from the mega caps.
Focusing on the fixed income responses, almost half expect negative total returns from government bonds in 2014. High yield was the only segment expected to return more than 5 per cent this year with investment-grade bonds and emerging market debt falling between these two extremes with a sub 5 per cent forecast total return.
Rising interest rates are clearly expected to be the biggest risk facing both corporate bonds and sovereign bonds with the majority of respondents identifying this concern. Every respondent expected activity in the loans space to increase or stay the same in 2014 as 2013.
An almost similarly overwhelming response came with regards to the question of whether they would rather be exposed to credit risk or interest rates risk with 92 per cent indicating the former. Almost two thirds of managers expected demand for asset-backed securities to grow this year.
It appears that one should expect modest single-digit returns from bonds in 2014 being almost entirely generated by the yield rather than capital gains.
The wariness of duration is reflected in our portfolios where we have an overweight to floating rate instruments such as loans and mortgage-backed securities rather than fixed-rate government or corporate bonds.
It is clear that equity managers are far more optimistic than their fixed income peers.
Ian Aylward is head of multi-manager research at Aviva Investors