Bob Doll's 2023 Predictions Underperformed

Bob Doll, noted prognosticator and CIO of Crossmark Global Investments, this week said five of his 10 annual investment predictions for 2023 came true amid what he called a challenging year for investors.

His formula involves blending conventional wisdom, which often turns out to be correct, with some riskier bets. This year was different.

Doll said his calls for 2023 produced one of his “worst years,” below his average of 7.0 to 7.5 over 30 years of predictions. Most notably, he called for a recession that has not come. He did predict correctly predict the drop in inflation.

“Multiple expansion despite flattish earnings confounded most investors even as a much-anticipated recession did not materialize,” Doll wrote. “Investors enjoyed falling long-term interest rates in the back part of the year, even as the Fed raised rates multiple times reaching the 5 1/4% level.”

Half Wrong

The predictions Doll got wrong included:

A shallow recession in 2023, which ultimately did not occur. Stronger-than-expected consumer sentiment, driven by a robust, yet weakening labor market and leftover cash resources from the COVID-19 pandemic period allowed for sustained economic growth, according to Doll’s report. Yet cautionary signals from lead indicators of recession, such as the yield curve and money supply, persisted through the end of the year.
That a major asset class would not change up or down by a double-digit percentage. In reality, stocks catapulted higher than that marker. The surge was led by the “Magnificent 7” stocks from Apple, Microsoft, Google, Amazon, Nvidia, Meta and Tesla, he noted.
That the sectors of energy, consumer staples and financials would outperform utilities, technology and communication services, on the premise that value beats growth. But the prediction, he noted, was “way off the mark.” Instead, growth beat value, with technology and communication the year’s best-performing two sectors. Meanwhile, energy and consumer staples were down for the full year.
That the average active equity manager would outperform the index in 2023 was incorrect. The dominance of the “Magnificent 7,” coupled with underperformance by average stocks and a shift toward more equally weighted portfolios by active managers, disproved this prediction early in the year.
That international stocks would outperform those from the U.S. for the second year in a row fell short due to the notable outperformance of mega-cap growth stocks in the U.S., coupled with a dollar rally and economic challenges in various parts of the globe.

Half Right

Doll did get 50% of his predictions correct, which, though lower than his usual average, showed some strong prescience in areas where others got it wrong. Those included:

Inflation fell substantially, in part due to stronger interest rates, but remained above the Federal Reserve’s target of 2%;
The federal funds rate reached 5% and remained there for the balance of the year;
Earnings fell short of expectations due to cost pressures and revenue shortfalls;
India surpassed China as the world’s largest population and is the fastest-growing large economy; and
A double-digit number of candidates announced they would run for U.S. president.

Doll is scheduled to release his 2024 outlook on December 29, he wrote. One big question is whether the consensus view of the double-digit earnings growth, no recession and Fed rate cuts commencing early in the new year can all come together.

“We are dubious that all these good things can happen simultaneously,” Doll wrote.

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Tags: 10-Year Treasury, Bloomberg US Aggregate Bond Index, Bob Doll, Crossmark Global Investments, Federal Reserve, Inflation, recession, S&P 500, Stock Market

An overwhelming majority of outsourced chief investment officers say their clients want increased exposure to private assets in 2024, according to research by Alternatives Watch Research and investment manager Vidrio Financial LLC.

The 2024 “Outlook for OCIOs” report surveyed OCIOs representing $660 billion in assets from August through October. The report, intended to be released annually, detailed OCIOs’ perspectives and their outlook for upcoming technologies such as artificial intelligence, as well as their thoughts on geopolitical conflict and ESG investing.

Private Markets Take the Spotlight

A majority of OCIOs said their clients’ long-term horizons focus on investing in illiquid, alternative assets, such as private equity, in search of higher returns. “If you look at portfolio performance in the E&F space, those with significant private equity exposure have definitively outperformed their peers,” a respondent in the survey said.

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Approximately 55% of OCIOs said they expect private equity to account for new allocations over the next 12 to 24 months. Another 33% said private credit strategies were attractive, while real estate, hedge funds and fixed income together comprised the remaining 12%.

Out of the OCIOs surveyed, 78% said endowments and foundations are their typical clients. The remaining 22% reported having pension funds and family offices as clients. Because endowments and foundations have to support spending, these institutions require higher returns on their investments and thus seek out alternatives.

“Private equity has historically offered an illiquidity premium that is likely to continue to exist in the 200-300 basis points range at the low end and the 500-600 basis points range at the high end,” according to one firm cited in the survey.

While private equity is the most popular asset class amongst OCIO clients, credit strategies—including public credit—are viewed with interest. One respondent noted there have not been many distressed opportunities in the past decade.

“Credit is offering the best risk-adjusted return with the least amount of uncertainty,” said one OCIO who works primarily with pension funds, according to the report. “While many see volatility emerging due to refinancing risk, the returns in credit are around 10%.”

Issues in Putting Assets to Work

The research cited liquidity constraints as the greatest impediment to putting assets to workby many OCIO managers about their clients, with 44% of respondents saying they are an issue. Market volatility was reported as an issue by 22% of respondents, while access to managers came in at 22%. Market uncertainty was a problem for 12% of respondents.

According to a spokesperson for Alternatives Watch Research, add-on commitments or re-ups were taking up capital with existing private capital managers/strategies for some OCIO clients, since the windows for allocations in private markets are longer in nature than those for public investments.

According to the survey, private equity managers have reported that fundraising is down across the board, although most clients’ portfolios are becoming less liquid.

The survey also found that 70% of respondents say market volatility will be a top challenge over the next 12 to 24 months, while 30% say valuation of assets is a top concern.

Why OCIOs Are Hired

Most OCIOs are hired to help manage clients’ increasingly complicated portfolios, according to the survey, with 44% of respondents saying nonprofits have needed help with their portfolio complexity. Improving governance was another reason for a firm to hire an OCIO, cited by 34% of respondents. The remaining 22% said OCIOs are sought after to streamline investment operations.

“It comes down to the complexity of managing the endowment and the resources to apply to that task,” one respondent quoted in the survey said. “Unless you are a $2 billion endowment or more—it is challenging to build a team.”

The survey also found that most OCIOs are being retained for the long term, with 55% of firms retaining their OCIO for more than 10 years. Among respondents, 30% said they have retained their OCIO for between five and 10 years, while 15% say their retention timeframe is three to five years.

Client relations with OCIOs also vary. Some OCIOs come in, fire existing managers and rebuild a client’s portfolio on Day 1 of their engagement, while others take a more detailed and tailored approach to asset allocation, according to their client’s needs, according to the report.

Sometimes liquidating a portfolio can be sensitive, as many institutions have close relationships with their managers. In these cases, OCIOs are expected to take over the day-to-day management of that account. The approach each OCIO takes with their clients depends on client needs, and “that means understanding existing holdings and relationships, and driving whatever change is necessary cautiously but systematically over time to achieve good results for the client,” said one OCIO quoted in the survey.

Artificial Intelligence and Technology

OCIOs and their clients are increasingly interested in integrating artificial intelligence into their workflows, while a vast majority of firms (90%) reported they expect technology to have a major impact on the OCIO industry over the next five years.

“We think we could feasibly be on the brink of another technological precipice much like we were in the 80s and 90s,” said one OCIO client cited in the report. Artificial intelligence could create a great deal of efficiencies across our business.”

The report noted that AI will likely have a significant impact across nearly all workflows. According to a spokesperson for AW Research, a number of the firms surveyed expressed interest in using artificial intelligence for investment research.

AI is being used by OCIOs and their clients for numerous other purposes. One respondent in the survey reported using AI to compress memos or emails to one paragraph from three, allowing the marketing team to spend more time pitching to clients.

Some OCIOs reported using ChatGPT to research potential managers. OCIOs are asking managers if they are leveraging AI effectively. Across the board, OCIOs are not worried about losing their jobs to AI; rather, they expect the technology to boost their business. “The work of designing portfolios and listening to clients can’t be replaced by AI technology,” one respondent said.

ESG

OCIOs are overwhelmingly integrating environmental, social and governance considerations into their business, primarily as a result of growing client demand, especially from foundations and other mission-oriented investors. Approximately 90% of OCIOs reported integrating ESG factors. The remaining 10% of OCIOs reported being undecided on ESG integration.

According to one respondent, a CIO at an OCIO firm, clients are increasingly interested in aligning their portfolios with missions. Another respondent said that ESG is necessary, but clients are becoming more focused on DEI.

However, regulatory concerns are an issue for some OCIOs. Since the foundation of a climate and ESG task force within the SEC’s division of enforcement, some firms do not talk about their ESG focus, according to the report, in fear of receiving penalties for making false claims regarding ESG, something that happened against DWS Investment Management Americas, which in September paid $25 million to settle claims with the SEC over “concerning” statements the firm made about its ESG investing process.

The survey found that while many OCIOs and clients are interested in ESG, much of that interest is focused on energy transition, and finding allocation strategies that “best meet ESG guidance while still driving performance across private market strategies” in that sector.

This survey was conducted by Alternatives Watch Research, a data and analysis driven research firm, and Vidrio, a technology-enabled service for allocators that provides data and portfolio management software to institutional investors.

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Tags: Alternatives, Alternatives Watch Research, Artificial Intelligence, Asset Allocation, OCIO, Vidrio

Bob Doll’s 2023 Predictions Underperformed

Half Wrong

Half Right

Alternatives Watch Research, Vidrio Release 2024 OCIO Outlook