Executive summary:
- The need for customized, uniquely tailored solutions continued to rise in 2024.
- 2024 was the largest transition year by volume at Russell Investments.
- The shift toward derisking continued, with many clients moving from equities to fixed income.
At Russell Investments, 2024 was a banner year for our customized portfolio solutions (CPS) and trading teams. We're grateful for the increased opportunities to help clients improve their portfolio oversight, reduce expenses, manage risk, and position investments for greater returns. But what trends drove the uptick?
Summarized below are the major trends we observed across our business last year and the key issues we helped solve for clients.
Overall trends
At a broad level, we saw three major themes play out in 2024.
- Drive toward customization
We leveraged our implementation platform for custom in-house models and the integration of custom screens and exposures to meet this rising need.
- Increasing number of clients integrating their exposure management solutions
This was chiefly accomplished through overlays, cash, and equity exposures.
- The adoption of transition management by financial institutions to manage increasingly large and complex restructures
Exposure management
Here are the noteworthy milestones and key developments we saw in exposure management in 2024:
Fixed income management
Clients are increasingly hiring Russell Investments to manage passive Treasury/STRIPS mandates and take advantage of the increased capital efficiency from pledging bonds to satisfy initial margin requirements for their overlay program (instead of using cash).
Cash equitization
As equity markets hit new highs, equitizing cash with futures continued to be extremely relevant and value additive. Despite this being the oldest of our overlay strategies (we started doing this in 1986), there are still many institutions that haven't implemented such a solution and have experienced many years of benchmark underperformance—underperformance that we believe is avoidable. Over the last 45 years, this translates to 16 basis points per year for a typical multi-asset portfolio. Looking at the cost/benefit ratio, clients are retaining net-of-fees profits at a multiple of approximately 40-50 times the fees. In other words, the service more than pays for itself.
Equity security customization
We have seen increased demand for custom equity exposures that meet broader needs in our clients' portfolios. These exposures can include risk and exposure tilts around regions, sectors, and factors to complement other strategies held in a total portfolio, and can often include custom screens that align with an organization's mission.
Options
With high equity valuations, many institutional investors wanted to hedge the risk of a selloff. Why? When volatility is low—as it was much of last year—buying option hedges like put spreads has been historically attractive, in terms of premium cost.
Funding costs
As equity markets soared, funding costs for derivatives remained elevated. Since many of our rebalancing clients were overweight equity, the increase in funding costs worked in their favor, because it was a performance tailwind. For clients with long equity derivative positions and cash on hand, we were able to reduce their costs by converting from futures to physicals.
Transition management
Here are the noteworthy milestones and key developments we saw in transition management in 2024:
- At Russell Investments, 2024 was the largest transition management year by volume, surpassing the 2021 high watermark.
- Comprehensive capabilities: The growing role of fixed income in transition management, combined with our global equity, derivatives, and currency trading capabilities, provided our clients with a complete toolkit for total-portfolio changes.
- Increased interim management: Due to poor performance and scandals involving some managers, investors acted swiftly in 2024, leading to a rise in interim management mandates in the fourth quarter.
2025 and beyond
- Strong pipeline: The pipeline for pending transitions is robust, with implementation carryover from decisions made in 2024.
- Emerging themes:
- Shift to active/factor/completion portfolios: A move from passive to more active and factor-based portfolios.
- Increased fixed income activity: With defined benefit (DB) plans becoming more fully funded in 2024, fixed income activity is expected to rise in 2025, with more de-risking.
- Large OCIO Implementations: OCIO solutions are moving up-market, with larger DB plans more receptive to outsourcing.
- Leveraging implementation platforms: Asset owners with sophisticated but limited investment teams are increasingly leveraging a broad set of implementation and trading solutions from a single provider. As an extension of the investment teams, these partners bring scale and efficiency to managing complex portfolios.
Trading & execution
Here are the noteworthy milestones and key developments from our trading & execution desk during 2024:
Trading volumes
Equity trading volumes were up in 2024 while fixed income volumes were down. This was the opposite of what we saw in 2023, when equity volumes were down and fixed income volumes were up. Much of the reason for the reversal can be chalked up to volatility in rates and the onset of the Federal Reserve (Fed) easing cycle.
Shift to derisking
We continued to see clients derisking and moving from equities to fixed income in 2024. Additionally, we also saw fixed income extending duration to the longer end, with investors buying long credit and Treasury STRIPS.
Efficiency improvement
We drastically improved our infrastructure and technology through our improved EMS (execution management system) capabilities, launching of proprietary algorithms in fixed income, improved dark pool liquidity venues, and upgraded middle-office services.
The bottom line
As 2025 kicks into gear, we anticipate that the need for specialized investment services will continue to rise amid an ongoing increase in portfolio transitions and restructurings. At Russell Investments, we look forward to developing and implementing customizable solutions for our clients that can help them navigate this new environment. Let us know how we can help.