Investment funds worldwide are taking action to protect their portfolios by turning to assets that act as stores of value. Recent data from the Bank of America reveals that these top funds, with a total of $256 billion in assets under management (AUM), have been cutting their positions in bonds, banks, and insurance companies. Their rationale is based on the anticipation of a significant drop in bond yields following Federal Reserve interest rate cuts.
According to the BofA Global Fund Manager Survey, a remarkable 91% of fund managers surveyed now believe that short-term interest rates will decrease over the next 12 months. This figure has steadily risen from 87% in December 2023, marking the highest level of bullish sentiment on interest rates recorded since BofA began conducting surveys in 2001.
As a result of this growing confidence in rate cuts, investment funds have directed their capital towards assets that stand to benefit from lower interest rates, such as commodities and real estate. This shift in strategy has led to a reduction in holdings in banks and insurance companies heavily invested in bonds, as well as a move away from bond markets themselves. Additionally, investments in the United Kingdom and Japan have also been scaled back.
Instead, funds have chosen to invest in assets that are likely to experience a surge in value due to lower interest rates. Notably, the real estate market has seen investments reach a 12-month high, as the affordability of mortgages increases thanks to lower interest rates.
This strategic pivot by top investment funds demonstrates a proactive approach to safeguarding their portfolios amidst an expected decline in bond yields. By diversifying their holdings into areas that offer stability and growth potential, these funds are positioning themselves strategically for the future.
Investment Trends in 2024
Investment funds are actively seeking opportunities in cash and commodities, as they anticipate an increase in their value. This is primarily driven by the decline in the relative opportunity costs of holding these assets compared to bonds, especially if yields continue to fall.
The Impact of Federal Reserve
A significant majority of funds surveyed (52%) believe that the Federal Reserve will have the greatest influence on equity prices in 2024. Moreover, more than two-thirds (68%) predict that the Fed will be the key driver of bond yields globally in the coming year.
Benefits for Technology and Biotech Companies
Investors foresee technology and biotech companies as the primary beneficiaries of falling interest rates. The accessibility to cheap capital is expected to boost innovation-driven growth companies that heavily invest in research and development (R&D).
Leading Industries for Investment Funds
As of January 2024, investment funds heavily concentrate their investments in the healthcare and tech sectors, ranking them in first and second place respectively. Meanwhile, investment funds have the lightest exposure to U.K. equities, indicating a lack of confidence in this market.
Ongoing Investment Strategies
In a broader sense, investment funds remain overweight on bonds and the U.S. economy compared to the past 20 years. Conversely, they continue to be underweight on the U.K. and Eurozone economies during this same two-decade period.
Economic Growth Comparison
Since the onset of COVID-19, the U.K. economy has experienced slower growth than all other G7 economies except Germany. From the fourth quarter of 2019 to the third quarter of 2023, the U.K. economy expanded by just 1.4%, according to OECD figures.
By comparison, the Eurozone and Japan recorded a growth rate of 3% during the same period, while the U.S. economy grew at an impressive rate of 7.3%. Among the G7 countries, Germany reported the slowest growth, expanding by only 0.3%.
Investment trends in 2024 are heavily influenced by the Federal Reserve, the potential benefits for technology and biotech companies, and the performance of different economies. Investment funds position their portfolios accordingly to maximize returns while minimizing risks.