For more than 20 years, the investment environment has been markedly friendly, with markets boosted ever higher by accommodative monetary policy, unimpeded trade between countries and a relatively benign geopolitical backdrop.
But with trade wars – and real ones – now sweeping global markets, the asset owners that ply them for returns might have to rethink their strategies.
“If we look at the Australian superannuation funds, a lot of them have got a very risk-on approach – 70/30 [growth/defensive split], or more than that,” Yue Cao, principal for strategy and planning in the office of the chief investment officer at the $216 billion AustralianSuper, told the Top1000funds.com Fiduciary Investors Symposium in Singapore.
“If you take more risk, you’re more concentrated in the US, and you’re getting a pretty good deal. But now the risk mitigation, the downside protection, is probably more front and centre.”
But the timing and magnitude of portfolio changes matter, Cao said, and asset owners have to block out the short-term noise – like the constant stream of headlines generated by the Trump administration – and be open to new information in order to make decisions effectively.
“Given that it’s a lot of change, we don’t want to pretend we know everything; we have to build, relentlessly, this openness and agility in our decision making and take on different perspectives,” Cao said.
“How do you make sure that different voices, those unwelcome voices, get a place in the decision-making? Asking the right questions gets you a better result than defending the answer you think is right.
“But what’s exciting for me is that the next 10 years are going to be a much more exciting period than in the past. It’s more difficult, but we will see more diverse approaches to deal with those things.”
Investor anxiety
John Greaves, director of fiduciary management at the $42.2 billion defined benefit pension fund Railpen, echoed the sentiment. Railpen is still targeting high levels of return and wants to take on illiquidity risk, but has the growing sense that the “portfolio is perhaps not well set up for the coming decades”.
“Probably like a lot of portfolios, if we’re being realistic,” Greaves said. “But the challenge is, what do you do about that? We’ve been very reliant ex-post on the equity risk premium, and that’s mainly come from the US, and in previous decades it’s come from other parts of the world. So we have about 40 per cent of our assets in the US, but it’s about 70 per cent of our equity risk across private and public. And the rest of the portfolio tends to be more secure credit, real asset, government bond type assets. It’s consuming a lot of our risk and it’s a key driver for us.”
So Railpen could geographically diversify its portfolio, or bring new assets into it – which it’s been doing, with the addition of more credit, real assets and diversifying strategies. But that might not be enough, Greaves said.
“What if assets just generally across the board are not going to be delivering the returns, or at least the real returns, that you need?” he said.
“I’ve had a lot of conversations on what a more dynamic, nimble process might look like, in terms of trying to read the tea leaves of what’s priced in and what’s happening now that’s fraught with risk. So how do you systematise that and build it into a reliable process? But it might be a requirement of the world we’re in.”
That world is probably one where there are more macro shocks, Greaves thinks, driven by the changed policy responses of central banks, economic protectionism and geopolitics – and asset owners will have to spend more time thinking about non-financial risks. Aaron Bennett, CIO for the $11 billion University Pension Plan Ontario, agrees.
“I love thinking about geopolitics, though in the 25 years I’ve been in finance I’ve often viewed it as idiosyncratic – something I can avoid,” Bennett said. “And one of the things that has really hit home with me is that the geopolitical risk that we’re experiencing does have the potential to be systematic and not idiosyncratic, and that’s quite scary, and does cause you to think differently about your overall portfolio and your exposures.”
Portfolio trend
But the economic disruption started by the Trump administration could also have a hopeful element.
“There’s the idea of galvanisation, and what the opportunity is around that for my own country, Canada, and for others. And we’ve seen what used to be considered politically impossible in Germany look like it’s actually going to happen, and I think about other countries where that could actually happen.”
And there are other shifts to reckon with – like the switch more and more asset owners are making away from strategic asset allocation and towards the total portfolio approach (TPA), which has become increasingly popular and has found advocates and users in the likes of the Future Fund, NZ Super and GIC. According to June Kim, senior investment director at the $350 billion CalSTRS, it seems like “everybody’s doing TPA, or moving towards it or thinking about it”.
“And what is TPA?” Kim said. “Everybody has a different interpretation or way of implementing it.”
“I started to worry a little, because is this an area where the alpha is going to dissipate because everybody’s doing it? I don’t think so, because it’s a process and a philosophy rather than an investment strategy. We’re in the process of trying to implement a more centralised lens – we’re calling it total fund management.”
Following the appointment of new CIO Scott Chan in 2024, CalSTRS is currently assessing the risks and resiliency of its portfolio across public and private markets to see if there are “any big gaps”.
“The recommendations that come out of this in the next couple of months will lead into potential asset allocation shifts as we go into our every-four-year asset liability management study and the prep work for that,” Kim said.
“Anything would be at the margin given the size of our portfolio. But one of the areas we’re looking at is the defensive bucket. We have a 10 per cent allocation to risk mitigating strategies. Their whole purpose is to be a hedge to our growth exposure and that’s a large chunk of the portfolio, so part of this exercise is to see what’s the right sizing of that.”
