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A Letter from Our CIO: Delivering a Reliable Experience in Turbulent Times

CIO, Systematic Equity

Equity Volatility in 2022

It is amazing how much can happen in a single year.

When I look back, it seems that the two main drivers of equity market returns have remained consistent throughout 2022 – namely, the investor uncertainty around Russia’s invasion of Ukraine last February, and the subsequent bout of global inflation and global central bank responses.

Since my last note, Russia continues to be isolated from global capital markets. The country is removed from every major global and emerging market index. Prices for Russian securities are still effectively priced at zero around the world. The US Federal Reserve (Fed) raised rates by another 200 basis points since September to finish the year with a total of 7 hikes and 425 basis points to combat the rapid pace of inflation, which peaked at 9% in June, its highest in 40 years.

With so many questions lingering throughout the year regarding the future in eastern Europe, as well as the ability of global central banks to control inflation without overtightening to the point of tipping global economies into recession, equity markets ended down, on average, about 19%, the worst annual return since 2008.1

Precipitated by rising inflation, led by rising oil and commodity prices, energy was the only sector to finish the year in positive territory, up over 40% in twelve months, in stark contrast to the broader market.

Resilience of Our Global Equity Beta Solutions Business

Given the nature of our Global Equity Beta Solutions business, it is no surprise that our assets under management (AUM) tend to have a high beta (pun intended) to global equity markets. In 2022, our AUM were in lockstep with equity markets – down 19% from our record high in December 2021.

While our aggregate AUM declined, there were bright spots: Our Global and All World Strategies, as well as Global REIT strategies, saw net inflows of approximately $16 billion and $7 billion, respectively, in 2022. In terms of distribution channels, we saw net inflows from our intermediary channel, which continues to represent a substantial portion of both flows and AUM.

Amid the broad market turmoil, our clients expect us to provide reliable exposures to both broad market and narrowly defined indexes, and to track them as tightly as possible, regardless of changing market dynamics and increased volatility. I am proud to say that we rose to the occasion, with 99% of our portfolios tracking within their expected tolerances.

Looking Forward to 2023

Considering the circumstances, there is much to be proud of and to celebrate as we look forward to 2023. We continue to maintain our leadership position as the fourth largest asset manager in the world by AUM.

We continue to invest in our Equity Beta Solutions business and double down on our commitment to indexing as the growth engine of both our industry as well as our firm.

To this end, we have expanded our global portfolio management team to achieve the scale required for our business to grow and succeed. We have onboarded several new data sets and migrated our index research platform to the cloud to enhance our ability to build custom solutions and bespoke exposures tailored to the unique needs of our clients.

Closing Thoughts

The concerns of 2022 have certainly not abated. The war in Ukraine rages on, and inflation and central bank tightening continue to be a major source of concern. That said, the markets seem to be feeling optimistic: Global equities have already risen over 7% through January of 2023.2

Passive investing is as relevant as ever and is gathering an increasing share of flows as investors continue to embrace the benefit of a long-term commitment to a diversified, low-cost investment strategy.

In addition to the current of increasingly sophisticated request for proposals (RFPs) for core equity mandates, we have seen a notable uptick in client interest around niche strategies that provide liquid, indexed alternatives to asset classes that tend to be less correlated with traditional equity-and-fixed-income portfolios, such as real estate, commodities, and infrastructure.

Furthermore, we have seen renewed interest in Smart Beta after 2022 saw the reversal of the decade-long underperformance of Value-oriented strategies, which outperformed their Growth counterparts by over 20% in the past twelve months.3

We welcome the opportunity to support our clients as they seek to complement strategic asset allocations with targeted solutions to improve risk-adjusted returns. The role of equity indexing is not to predict the markets, but rather to ensure that investors receive exposures they require in the most efficient manner possible, no matter which way the markets go, or how quickly they move.

For 40 years we have delivered on our commitment to provide a reliable experience in a myriad of market environments, and we delivered on that commitment once again in 2022.

2023 will be no different.

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