FIS Digital – June 2020

Transition portfolios of stocks and cash

Forget traditional portfolios of stocks and bonds, in portfolios of the future, low yielding bonds could be ditched for cash suggest FIS2020 Digital panellists.

Conventional 60:40 investment portfolios divided between stocks and bonds could shift to 60 per cent allocations to equity and 40 per cent allocations to cash.

“You may find bonds don’t’ play a role,” predicted Stewart Brentnall, CIO at NSW Treasury Corporation, the investment arm of one of Australia’s state governments. Speaking at FIS 2020 Digital, Bentnall said investors should “wake up” to the impact of low yielding bonds in their portfolios, and noted that cash allocations allow governance teams to “to sleep at night” as an alternative to conventional fixed income.

Such new-look allocations could form part of what Brentnall called “transition portfolios” that incorporate measures for the future.

He said asset prices today poorly reflect the risk they carry. Moreover, Covid-19 has acted as a catalyst in highlighting the differences between mature (US and Europe) and less mature (China and Asia) markets that will impact benchmarks. Regarding globalisation, he welcomed the idea of production moving to new and alternative countries expressed by Nobel prize winner and professor of finance at MIT, Esther Duflo but said globalisation in its current form “would not flip on a six pence.”

Elsewhere, he said improving pollution levels and less environmental degradation because of the global lockdown could be a catalyst for investors to take positive action. Similarly, the “rising heat” on social justice issues can no longer be ignored. He said today’s low inflation could shift to inflation or stagflation and urged investors to bring their “mission” and “governance” arms together, citing NSW Treasury Corporation own efforts to look again at the mission of its clients and their ability to invest long term.

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History tells us that global growth will continue. Charting the growth of per capita GDP through the centuries shows the persistent engine of “fundamental human ingenuity and productivity,” said Geoffrey Rubin, senior managing director and chief investment strategist at Canada’s $420 billion CPP Investments. Despite today’s handwringing and challenges, he said looking back into the past gives confidence that economic development will stretch into the future too.

Diversification will be key, while investors will also need to look “deeper than labels” to try and understand performance drivers. Elsewhere, low interest rates and the impact on government bond yields will see investors hunt for more opportunity in real assets and infrastructure. Regarding China, Rubin said the Canadian pension fund is moving towards a 20 per cent allocation to the country and said building exposure to the engines of Chinese growth was an “imperative” for both returns and diversification.

Angela Rodell, chief executive officer at Alaska Permanent Fund Corporation, believes that investment in technology will be a key driver in the years to come because COVID-19 has proven its link to GDP growth. She shared panellists’ concerns about low yielding bond allocations and rising inflation, noting counter strategies could include “looking at commodities differently” or allocations to gold or even crypto currencies.

She flagged the risk of getting “left behind” as “technology changes so rapidly.” Alaska will also focus on how it invests in healthy supply chains, exploring particularly how technology will help manage inventories and risk, she concluded.

To listen to the podcast with Geoff Rubin from CPP Investments, click here


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