A decade of disappointing absolute levels of return for emerging markets has investors re-thinking their exposures. But emerging markets are still more than 50 per cent of global GDP, and with growth driven by an entrepreneurial culture these companies are a key part of the “new global economy”. A group of investors convened in London to explore opportunities, the right risk/ return trade off and how to best gain exposure.

It may seem counter-intuitive to kick off a roundtable discussion on emerging markets talking about the United States but what happens in the US has an important impact on the rest of the world, given the size and interconnectedness of the US economy and investors’ relative diversification away from it, or overweight to it.

A functional US and China relationship is particularly important for global growth.

For investors, the Federal Reserve’s interest rate policy and stimulus pose a key challenge for allocations to emerging markets, as dovish policy has underpinned US growth for almost a decade, and helped the US stock market and, in turn, global equities outperform emerging markets.

But the outlook for emerging markets is on the up and up. On top of traditional arguments, including diversification, higher populations, and the rise of the global consumer and middle class, the wave of capital that has flowed out of emerging markets and into developed markets over the past five-to-six years, has driven developed market valuations higher and higher, and increased the attractiveness of emerging market opportunities.

“It’s clearly an interesting time for investors as we’re likely entering a period of heightened volatility around issues like trade and international relations,” said Derek Walker, managing director, head of portfolio design and construction, total fund management at Canada’s CPP Investments.

“We try and separate short-term dynamics from our thinking on the long-term in our strategic asset allocation. On the long-term side, our focus is on determining if there are structural shifts?”

“When it comes to the dominance of the US in the global financial system and its role in the global economy, we’re not seeing dramatic changes on that front, at least over the near term.”

Despite a “cautious” long term stance, particularly on China, CPP Investments aims to build a globally diversified portfolio. It is “broadly comfortable” with how it is positioned, Walker said.

From a short-term perspective, the group is closely monitoring the political environment in light of the US election results.

“One thing that is reassuring from an investment perspective is that, looking back on global trade dynamics during prior US administration, there was a lot of noise around trade but, in the end, deals got done such as the USMCA agreement and things settled down eventually,” he said.

Rasmus Nemmoe, portfolio manager, FSSA Investment Managers, said the US economy had been very strong for many years, due partly to some great companies, but also some “one-off” stimulus measures including tax cuts in 2017 and Covid-19 stimulus, plus the increase in immigration. But he argues over the next five years or so, the marginal direction of many of the drivers that have led to strong growth in the US, are not going to be as beneficial.

“I’m not suggesting that they will collapse but, at the margin, they’re not going to be as beneficial,” he said.

“For example, it is unlikely that the US can continue with the current level of fiscal excess because there is an inflation issue. The bond market will start to react more meaningfully. Trump also got elected with an anti-inflationary mandate so a lot of the drivers that have propelled US growth don’t look as strong on a forward-looking basis.”

“Starting point equity valuations today are also significantly different to what they were six to seven years ago. The US is not a cheap place. It shouldn’t be a very cheap place, but it feels excessive right now.”

“We are probably entering a period where US growth will start to disappoint and that means the [US] dollar will potentially not be as supported, which typically favours a more positive and benign outlook for the rest of the world.”

But even with Trump in the White House, Michela Bariletti, chief credit officer, Phoenix Group, said the US was still “very compelling”.

“Trump likes his equity market and he doesn’t like to lose. The equity market is our big hope that his policies do not derail the economy,” she said.

“Trump wants to implement pretty dramatic policies and he has the power to do it so we are really questioning if the [US] institutions will survive the next four years? It’s easy to start picturing a gloomy scenario in terms of whether the rule of law and the institutions will be able to continue functioning.”

“Something that gives us hope is that Trump loves the stock market. It is very difficult to see an alternative to the US because of its size and place in passive strategies and multi-asset strategies. It’s very difficult to get out of that market. What’s the alternative?”

Salami slicing

The £47 billion National Employment Savings Trust (NEST) believes there is still a strong case for emerging markets, despite a challenging decade.

“It has been an interesting journey these past few years, particularly with China and Russia, but we still believe in emerging markets,” said Liz Fernando, chief investment officer, NEST.

“About six months ago, we were indifferent to developed markets and emerging markets in terms of our relative preferences but, from a tactical perspective, we’ve been salami slicing our DM exposure because we think an awful lot of good news has been discounted. We took a view not to do that to EM, so our relative preference is now at the margin towards EM,” she said.

Taking a longer-term perspective, NEST is rethinking the optimal way to gain exposure to emerging markets.

The fund treats emerging markets (and developed markets) as a “lump” and does not take a country-specific approach. It currently invests in emerging markets through a systematic strategy that tracks the MSCI Emerging Markets Index and has a sustainable tilt.

Fernando said the Russia-Ukraine war prompted the fund to do some soul-searching.

“We’re really questioning, just because a country is in the Index, does it automatically deserve our members’ money? Can we protect our members’ interests by avoiding markets that are going to be challenged? Also, for countries that are highly exposed to climate risk, there is a high risk of emigration which may adversely impact their ability to raise taxes and service debt,” she said.

“Over a very long-term time horizon, we’re thinking about how we can be smarter than simply including a country because it’s in the index. We’ve not come to any conclusions yet.”

Relative to global indices, University of Cambridge Investment Management, which manages the university’s endowment, has been overweight UK and emerging market equities for several years, although Sarah Wood, associate director, marketable assets, said the fund is focused on absolute returns not relative performance.

“Our mission is to consistently deliver positive returns so we try not to pay too much attention to index weights,” she said.

“I’m very confident about tilting our portfolio towards markets that reward investors for being patient.”

“On both an absolute and relative basis, the US is so much more expensive. On a valuation basis alone, we’re finding cheap opportunities in emerging markets and, because we are a relatively small fund, we’re able to allocate capital using boutique managers. We’re not limited to places with a lot of depth in the market, which is perhaps one of our differentiators.”

University of Cambridge Investment Management has around five emerging market managers, including a regional Asia specialist and country-specific specialists.

“We like this approach because every country is so different. We partner with managers that speak the language, understand the social norms and have a local presence, which gives them the information and relationship advantage,” Wood said.

According to James Fernandes, deputy portfolio manager, investment strategy at Local Pensions Partnership Investments (LPPI), positions are not managed relative to the benchmark and the LPPI Global Equities Fund’s current underweight to emerging markets is a reflection of the relative attractiveness that LPPI’s external global equity managers see.

“The overall portfolio’s quality-style bias [is the result of] where our managers have tended to find a richer opportunity set in the US and Europe,” he said.

“Over the past few years, we have generally found a similar pattern amongst our peers that share similar style biases, where we have not seen any major incremental exposure to emerging market allocations, which have typically hovered around 5-7 per cent.”

Romy Shioda, managing director, Investment Portfolio Management at CPP Investments spoke of the recent challenges investing in emerging markets.

 “Our approach to stock picking is very much based on fundamentals,” she said.

“Within emerging markets, macro and geopolitical risk have broken the tie between fundamentals and stock return, and that’s the part that makes it difficult for us to continue having conviction in our ability to make money.”

 “There have been periods of great performance, but then we see government intervention and regulatory action that suddenly puts the brakes on.

While there were companies with a lot of potential, from a quality or growth perspective, Shioda said “exogenous drivers in certain markets may impede that growth.”

“That being said, we also have managers that have done well in recent years by taking these unique market conditions into account,” she said.

According to Mike Liu, head of markets and research, Coal Pension, it is important to distinguish between emerging economies and emerging equity markets.

When it came to emerging equity opportunities, Taiwan and Korea represented a significant proportion of the opportunity set but were highly developed economies with ageing populations.

Although China was ageing too, Liu said new sectors were emerging and disrupting industries.

South-east Asia, on the other hand, enjoyed a young demographic and expanding middle class, but the public equity opportunity set was comparatively smaller.

“If we’re talking about emerging markets, it’s less about GDP growth, which historically has had a low correlation to stock returns, and more about valuations, quality and innovation in certain sectors and countries,” he said.

“With China, I’m less worried about valuations, quality or innovation but, overall, I will pay a bit more attention to the geopolitical environment such as the risk of decoupling. Some investors have been concerned about investability, though it has become less an issue more recently.”

China, India and Mexico

The outlook for emerging markets is “probably the most positive” it has been for several years, according to FSSA’s Nemmoe, citing extremely attractive opportunities in countries including China, India and Mexico.

“It’s such a diverse market. It includes some of the most sophisticated companies in the world as well as frontier companies.”

“There are always opportunities in emerging markets, particularly right now, in China and India and, on a more tactical basis, Mexico.”

Despite the noise surrounding Trump’s re-election and the potential impact on trade, Nemmoe said Mexico represented excellent value.

“Mexican assets are very cheap, both relative to historical valuations and other markets,” he said.

There are always opportunities in emerging markets, particularly right now, in China and India and, on a more tactical basis, Mexico.

“Historically, whenever there has been [trade] tension, it has been a good buying opportunity. Mexico is positioned to benefit from long-term growth drivers, including proximity to the US, reshoring and investment flowing into the country that will formalise.”

However, if Nemmoe could only invest in one country for the next 15-20 years, he would choose India.

While FSSA Investment Managers has reduced its exposure to India over the past 12-18 months, it remains “very positive” about the country, albeit “cautious”.

“India has re-rerated to ridiculous levels in many ways but it still has the most desirable long-term drivers, although capital markets have a way of pricing that in pretty effectively,” Nemmoe said.

“Things are pretty red hot right now and you probably want to stay on the sidelines. I think China is quite interesting and Mexico too, and I’d probably be a bit more cautious on India.”

Walker agreed that India looked “very expensive”.

“There’s a bunch of things on the positive side but also areas that require further development in that market,” he said.

Russia (and then China again)

Although it made investors cautious at the time, Nemmoe believes that the freezing of Russian assets that occurred is unlikely to happen to China.

“Russia is still an extracting economy and commodities are fungible,” he said. “If you applied the same sanctions on China, it’s not just China that would be impacted. The entire global economy would collapse.”

When it comes to China, NEST’s CIO is “less concerned” about sanctions and simmering tensions between China and Taiwan, and “more concerned” about the renminbi (RMB) and increasing prevalence of variable interest entities.

“A key risk is currency convertibility and controls,” Fernando said, citing the painful experience with the Malaysian ringgit in the late 1990s.

With variable interest entities, investors don’t actually own equity in a company, “they may own equity in an entity that may have the legal right to the equity exposure in the company, but it also might not,” she warned.

“The risk comes through these more left field areas where the government is trying to stamp its authority and exert control to stop people getting too big for their boots.”

The Taiwan situation was worth monitoring for Coal Pension’s Liu, given it was “one of the most sensitive issues for the US-China relationship”.

 “The question then becomes, what could trigger an escalation or de-escalation [of tensions]? This has been a so-called headline risk for over 70 years so what makes it different now?”

“In the context of the US-China rivalry, I would pay more attention to what happens in Washington DC given some hawkish members in the upcoming US administration,” Liu said.

Phoenix Group’s Bariletti said that markets tended to be “quite naïve” about geopolitical risk, adding that Russia’s invasion of the Ukraine was largely unexpected, despite decades of boiling tensions.

“I’m not suggesting it’s the same situation with China and Taiwan but I’m cautious in reading the market behaviour in terms of real geopolitical risk,” she said.

“The market tends to keep geopolitical risk on the side until it flares up. The reaction to these events have been quite benign until you get to the channel of contagion being, for example, oil prices when it comes to the Middle East.”

Liu said the market was closely monitoring situations and risks around the world but it was “almost impossible” to price the time, magnitude and duration of these potential events.

Walker said there needed to be greater collaboration between geopolitical experts and investment experts to understand how best to navigate these risks.

“The market folks like us are trying to figure things out, but geopolitical experts and investment professionals speak different languages,” he said.

Asia (including China)

As the largest trading partner for many countries, China is probably the most important player in the global value chain. In Japan, South Korea and throughout the ASEAN, China is the leading trading partner.

It’s role and importance in the region can’t be overstated, which has implications for the US, said Nemmoe.

“If you put these [Asian] countries in a position where they had to choose between China and the US, it’s not a certainty that they would still choose the US,” he said.

“The US has hard power, but does it still have the same amount of soft power it had 40-50 years ago? As we shift from a bipolar world to a multi-polar world, the US will have to navigate these changes.”

According to Nemmoe, who is based in Singapore, the future is in Asia.

“Maybe I’m biased but the vibrancy, dynamism and innovation in China and throughout South-east Asia, you don’t see in other parts of the world,” he said.

“In Asia, there are new companies and new business models popping up all the time. There are first-time users of mobile phones and the internet there, and the level of entrepreneurialism is unrivalled.”

Sustainability

Roundtable participants talked about the importance of sustainability and action on climate change but stressed that expectations differed for companies in developed markets versus emerging markets.

“We have a slightly different carbon trajectory for emerging markets because they are on a slightly different journey and it’s not appropriate to hold them to the same standards,” said NEST’s Fernando.

“We can’t divest our way to net zero so [company] engagement is critical, although it is harder to do in emerging markets, which is something we worry about.”

While NEST is a well-known institutional investor in Europe, it doesn’t have the same clout in emerging markets. Furthermore, the size of the fund’s investment in companies is much smaller, making effective engagement difficult.

“In developed markets, we talk to companies about how they do business. We might also join a coalition of like-minded investors to drive positive outcomes, but we struggle to have the same impact in emerging markets,” Fernando said.

“From a stewardship perspective, it is something we think about and we don’t have the answer.”

We can’t divest our way to net zero so [company] engagement is critical, although it is harder to do in emerging markets, which is something we worry about.

One option that NEST has considered is holding fewer companies to potentially have greater influence.

When it comes to sustainability, one area of focus for CPP Investments is improving data quality so the fund can properly measure impact and enhance decision-making processes, particularly in relation to transition risk.

“Transition-related data disclosures aren’t always great and can be subject to significant revisions so we’re working with companies to improve their reporting,” Walker said.

FSSA Investment Managers has an extensive emerging market database, dating back to 1996, which it leverages not only in the investment process but also company engagement.

Environmental, social and governance (ESG) factors are fully integrated into the group’s investment process.

“We’ve always had the view that engagement is not something that we can outsource so we developed an elaborate questionnaire and built a data bank for every company we invest in,” Nemmoe said.

“We have benchmarked best practice, which helps us identify areas to engage with businesses on. We are constantly striving to better understand how ESG and sustainability issues impact long-term investment performance.”

As an active, bottom-up stock picker, with a relatively concentrated portfolio, FSSA has developed strong relationships with business owners and management teams, which Nemmoe said is a “real advantage”.

He concluded by emphasising the importance of engagement in emerging markets, especially for investors committed to embedding sustainable principles in their portfolio.

“A big benefit of having a large team and people on the ground is that we’ll meet with management teams five times a year. That access is hard to engineer,” he said.

“Active managers have a huge role to play in driving change. We can sit down with companies and challenge them about their practices, which is pretty powerful.”

Pension funds face growing pressure from stakeholders and trustees to focus on short-term issues. One common question queries why they haven’t invested more in US mega cap equities, for example. Meanwhile, CIOs and investment teams have little time spare to step back and take in broader themes and hear from different voices, threatening investment with group think.

Speaking during the closing session of the Fiduciary Investors Symposium at the University of Oxford, Richard Tomlinson, chief investment officer of LPPI, Mirko Cardinale, head of investment strategy at USSIM, and Mark Walker, chief investment officer of Coal Pensions shared some of their reflections on the current investment climate.

Tomlinson noted the importance of clarity of purpose for investors. Yet he said that purpose has become more complex. It used to be simple (financial returns) but today investors in the UK have to balance other priorities like investing in UK infrastructure, making the mission statement more hazy.

Investors are unsure of the extent to which they are investing for impact or financial return, or if they will come under pressure to divest. It makes working to clearly defined values and beliefs essential.

In the past, pension funds used to just focus on outperformance and alpha. A reference portfolio provided a simple framework for outperformance. Now many other factors have come into play that complicate decision making make it harder to judge performance.

Tomlinson welcomed greater transparency as helpful, but also noted that transparency creates challenges if investors lack clear goals. CIOs need “crystal clarity” on which decisions they are responsible for making and work to clear mandates, he said.

Despite today’s challenges, panellists reflected that investment is rarely straightforward. The days of stable, predictable equity premiums have long gone and pension funds are used to navigating a range of outcomes, anticipating change and understanding the different themes that drive macro outcomes.

Governance and remembering history

USSIM’s Mirko Cardinale noted that investors multiple priorities makes management and governance important.

“Having a good delegation framework is very important. Make sure non execs focus on the big picture,” he said.

Tomlinson stressed the importance of CIOs recalling history. Only this way will they open up their imagination to alternative risk scenarios. Younger people have no experience of higher interest rates, for example.

“It’s about looking more broadly and looking through the industry to have a broader risk conversation about what is plausible and possible. Big political and economic cycles, challenge your assumptions.”

LPPI conducts war gaming workshops to open up its thinking on geopolitics. The team mull questions around the outcome of attacks on assets like wind farms, or how the investor would navigate a dramatic fall in markets if China invaded Taiwan. The discussions provide a valuable window into risk appetite and bring past experience to bear.

At Coal Pensions, CIO Mark Walker’s key priority is ensuring liquidity on hand to pay pensions at the mature fund which has a very high pay-out ratio. “Where I get the money to pay the benefits is my first big worry,” he said, adding he faces growing short term pressure from stakeholders to find cashflows to pay pensions.

His biggest risk is a fall in economic growth, recession, or geopolitical instability impacting returns. “Taking stakeholders with you is important if you are a risk-taking organisation. You have to be really clear what the risk is,” he said.

Key risks

At USS, climate risk is viewed as a systemic risk and integrated into the investment process. The pension fund is a universal owner, and investment is framed against a thematic framework that includes the energy transition, alongside other factors.

Key issues front of mind include if the private sector has the capacity to provide solutions to the climate emergency. Elsewhere, Cardinale explained that USS plans for a series of different environments and scenarios. He said that inflation risk is likely across different scenarios and the investor is structuring in the impact of of supply shocks and structural pressure of inflation.

Panellists reflected on the importance of positioning for technical disruption, including tapping opportunities in the sectors most likely to benefit from AI. Walker reflected that Coal Pensions, dependent on external advisors, lost out from underweighting Nividia.

However the pension fund has netted other big wins. It was an early private equity investor in Space X, committing £20 million 10 years ago. “The rewards are good for tech investment; the early stage can be huge.”

LPPI’s Tomlinson reflected on the risk of investments suddenly becoming obsolete in a fast-changing world full of disruptive tech. In the coming years, will a new technology replace wind turbines? An asset might have a 30-year life but then suddenly become uneconomic to operate because something else comes out to leap frogs incumbent technology.

Cardinale agreed that AI and robotics will increase productivity and voiced his expectation that new technology will lead to new scientific discoveries.

Panellists reflected that it remains unclear if the benefits of AI will be accrued by different sectors in a disruptive process that leads to far more dispersion than the current investment landscape, dominated by big tech with the bulk of gains going to just a handful of winners.

APAC is positioned to benefit from some of the most exciting global trends that offer unparalleled investment opportunities, including urbanisation, mega cities, digitisation and the energy transition. Previous features in this series have focused on the region’s diversification benefits, short-term opportunities, and why active strategies work best. Buckle up for the long-term view.

Of all the trends set to impact APAC in the coming years, connectivity offers one of the most compelling opportunities in terms of monetary revenue and the speed at which the sector will develop. It is also immune from geopolitical risk.

Christy Tan

“Even if economies face growing competition and deglobalization, connectivity has its own momentum,” explains Christy Tan, managing director, investment strategist at Franklin Templeton.

5G penetration is forecast to hit 24 per cent by 2025 (up from 3 per cent in 2020) and 6G promises even faster connections in a dramatic boost to GDP that she says will be led by China. Connectivity is also spurring mobile penetration as people use smart phones to pay and socialise, creating an ecosystem of jobs, tax and revenue streams. Digitization also provides opportunities in technology like blockchain, AI, cloud computing and further up the supply chain, satellite connection.

Amber Rabinov, head of thematic research at $300 billion AustralianSuper, the country’s largest superannuation fund, believes that digital transformation is one of the most significant developments since the GFC. The team views trends through a global rather than regional lens, and she points to the changing composition of the top 10 stocks in the world by market capitalisation off the back of staggering earnings growth to illustrate the point.

“In 2024, nine out of the top 10 stocks in the world have a technology bent – chips, products or services like cloud computing,” she says. “Only one top 10 stock in 2004 remains a top 10 stock in 2024 – Microsoft.”

She also believes that AI’s impact on efficiency and productivity could arrive sooner than expected. “Previous adoption cycles show that it takes at least one decade and often two for a new technology to filter through the economy. There is good reason to think the AI transformation will be relatively rapid.”

The Government of Singapore Investment Corporation, GIC, guardian of Singapore’s estimated $770 billion foreign reserves, views investment in technology according to three themes: opportunities in disruption, protecting existing investments facing disruption and leveraging tech for its own investment and organisational processes.

One team assess industry trends and size the technology portfolio and composition. Another handle early-stage investments through venture capital funds, co-investments and directs supported by a strategy shaped around staying invested for the long term, including post-IPO. It enables tech companies to tap GIC for capital at different stages of their growth and connects the investor to the whole life-cycle of the company.

The green transition

Investors are also positioning to benefit from APAC’s energy transition from transport electrification to wind and solar, EV battery production and the development of low carbon tech. At Franklin Templeton, hydro is fast-becoming one of the most compelling investments bridging the transition, urbanization and infrastructure. Tan says the region needs half a trillion dollars in infrastructure investment between now and 2030.

“All investors in urbanization infrastructure must consider how water comes into play,” she says. “Hydro offers some of the most compelling opportunities.”

AustralianSuper, alongside Ontario Teachers’ Pension Plan, has invested in India’s National Infrastructure Investment Fund, NIIF. The investors put $1 billion each into India’s power, roads, airports, digital infrastructure, and logistics in 2019.

“We are a long-term investor so we can be patient. We don’t have to rush for opportunities and have strong cash flows,” says Rabinov.

GIC’s long-term capital makes it well positioned to ride out the short-term opportunity costs in green tech that some investors aren’t ready to bear. Like in 2023 when exits in climate tech declined and investment in the sector fell 30 per cent on the previous year despite the clear, long-term opportunity in the energy transition.

“Patient capital like ours is well positioned to navigate climate tech’s potential J-curve,” said chief executive Lim Chow Kiat in GIC’s annual report.

Shifting demographics

APAC’s shifting demographics also promise risk and opportunity ahead.

“The percentage of the population above age 65 across APAC is expected to rise significantly between now and 2040, and that 18 per cent of women will be in this age group, a rise from 11 per cent.” says Tan who points to statistics that show  China, Japan and South Korea  could have around 64 million less people by 2040.

But in keeping with APAC’s celebrated diverse economies, population decline in China, Japan and South Korea will be offset by large young populations in India, Indonesia and Pakistan. Moreover, the shift in demographics presents new opportunities.

“Older people have a different set of needs around healthcare, e-commerce and leisure. Expect a shift to a more consumption-led model,” predicts Tan.

Amber Rabinov

Still, investors are preparing for more challenging long-term trends too. At AustralianSuper the focus is on trends around deleveraging China and deglobalization and the expectation that trade volumes as a share of global GDP will continue to fall.

“Tariffs, subsidies and industry policies are front and centre in the current political and economic debate,” says Rabinov. “This process of trade fragmentation is occurring across geopolitical blocs, and we expect it is more than likely to continue.”

In APAC the renaissance of industrial policy has recently manifest in Australia under the Future Made in Australia framework. Rabinov expects government support will focus in areas like microchips, critical minerals, energy security and increasingly, defence. Despite the accompanying investment opportunity, she flags the growing role of governments in industrial policy is also spiking risk in the shape of larger fiscal deficits and debt levels. “This is not new, but it has accelerated,” she says.

Getting it right

Successfully investing in long-term trends requires awareness of where revenue streams are coming from and ensuring investments are scalable. Commentators also advise on a solutions-based approach as opposed to picking unproven opportunities.

“Pick investments that provide solutions to a problem like better healthcare facilities or more carbon reduction,” suggests Tan.

GIC also approaches investment through a problem-solving lens where a clear understanding of the business model in tech and spending time with production engineers is a prerequisite to investment.

“After seeing what problems they can or cannot solve in one domain, we can gauge the success of other domains,” states the investor.

Investors face fierce competition for assets in future-focused sectors like data centres and energy. But Tan celebrates the competition as indicative of the opportunity.

“Competition is a good thing – it ensures efficiency,” she says.

Long-term trends can also surprisingly quickly pivot. Regulation can change and technology investment is always accompanied by the risk of disruption down the line.

“Incumbents are constantly challenged by disruptors,” states GIC.

In a final note of advice, investors espouse the importance of boots on the ground. GIC has a local presence in innovation hubs in Beijing and Mumbai and AustralianSuper opened a Beijing office in 2012 for research purposes. Rabinov adds that internal investment is also a crucial pillar to successfully capturing future trends.

“Wherever possible, investments should be managed by those with local insights and proximity to the deals and target assets,” she concludes.

Published in partnership with Franklin Templeton Investments

APAC strategies: Why active management pays

In a region as diverse as Asia investors can lean in and take advantage of inefficiencies and inconsistencies around growth, central bank policy and diverse regulatory regimes; and asset owners in the region are increasingly finding active management, across all asset classes, optimises returns and reduces risk. Top1000funds.com investigates.

Opportunities in APAC: Diverse and dynamic

The list of reasons to invest in APAC is compelling and institutional investors in the region are increasingly tapping the opportunities. Top1000funds.com looks at the different levels of income, volatility, efficiency and ultimately returns across the region.

Canada’s CPP Investments currently manages C$675 billion in assets but is projected to reach $3.6 trillion assets under management by 2050. The operational challenges, particularly the evolution, thinking and implementation of technology supporting the investment process, are a key focus for Jon Webster, the investor’s chief operating officer who explained to delegates at the Fiduciary Investors Symposium at the University of Oxford how the fund sees technology as value enhancing rather than as a cost.

The pension fund for some 21 million Canadians uses technology “to make it a better investor” and deliberately puts technology into the hands of the team to ensure it is put to use and deployed.

Technology is framed as transformational, and within this context used as a substitute for labour and for synergising resources in the organisation. It is also used to expand the opportunity set and augment the ability to invest. Webster said that technology is used with a simple premise in a way that gives the team creative control on a safe and secure platform.

In the last 18 months the pension fund has moved away from rolling out big tech programs and projects, focusing instead on an operating role. This requires analysis of whether people want to use the technology, and if its investments in tech are having an impact. The hope is that this will stop the explosion of technology across the organisation, leading to choices around standardisation and complexity.

“We have to be paid for the complexity we put in,” Webster said.

Because the focus is on deploying technology, there is no pressure to innovate. “We have partners that do that,” he said. He added that the pension fund’s focus reamains on getting the technology into the hands of people who can deploy it and use it in a “super targeted” and “surgical” process.

Technology will only contribute to basis point performance if it goes into the hands of people drawing on those products. He also advised on the importance of tech investment at a base level which will then have a compounding effect over time. He advised on the importance of clear metrics to show the return on tech investment.

Perpetual modernisation is now a fundamental principle at CPP Investments. Integrating AI and machine learning stands at the fore of the latest wave of modernisation and illustrates how tech architecture evolves in a model that is upgraded, evergreen and anchored. Webster also reflected on the importance of knowing “when to buy and when to build” as well as ensuring the team always has the ability to alter course around choices.

He said CPP Investments management team is  clear about where technology provides an advantage, and described the investment team as “deliberate” about where technology adds value – like in research and active equities. (See How technology plays a central role in CPP’s evolving strategy)

Bullish on AI

Webster said CPP Investments is bullish on AI but noted that many investors are reticent and not embracing it.

AI represents a reconfiguration of the tech industrial complex and symbolises a totally new way of thinking. He predicted that all disciplines “that requires a large amount of thinking”  will be impacted by machines.

“40-80 per cent of what you do will be surpassed by machines,” he said.

The pension fund’s operations team already speak the same language as investors. For those that don’t, he said Chat GPT now speaks the language of investment, representing a fundamental change in how knowledge is acquired and distributed within organisations. The technology represents a competitive advantage because many organisations rely on the fact “they think they are above average.”

If “thinking is a material part of what you do” the playing field will level.

Webster urged investors to examine their edge. He said CPP Investments already has straight through processing and technology that reads the documents coming into the private markets operation, putting the information into ledgers, for example.

He acknowledged that it is difficult for teams to buy into the transformative power of technology but concluded that the barriers are now much lower to the incremental use of technology.

For thousands of years economic life was stagnant. Even before the 1950s, few people talked about the idea of economic growth as a measure of economic success.

Speaking at the Fiduciary Investors Symposium at the University of Oxford, Daniel Susskind, senior research associate, Institute for Ethics in AI and associate member in the economics department at the University of Oxford argued that the concept of sizing an economy is fairly recent.

Today it is clear that the pursuit of prosperity has come at a high price, evident in the destruction of the natural environment and sharp inequality. Meanwhile the disruptive impact of new technology like AI remains unclear. Susskind, who is the  author of ‘Growth: A Reckoning’,  said the current growth path of world economies is unsustainable because it is undermining the political system and disrupting communities.

“Growth is related to many of the problems we have today; the price of growth is behind many of our greatest challenges,” he said, linking the problems inherent in growth to a de-growth movement.

“Some argue if growth is the problem, then less growth is the solution.”

But he says that de-growth means freezing GDP at current levels that would abandon people to poverty. Moreover, economic growth has been revolutionary and improved lives, and future growth is possible on a different basis.

“My starting point is we need more growth,” he said.

Still, infinite growth is not possible on a finite planet where growth comes from old-fashioned economic activity based in factories or on farms. The UK is wholly focused on how to increase growth by looking at things in the material world like more houses and faster trains.

He said if we really want to drive growth, the answers won’t come from the material world. He said in the future, growth will come instead from discovering more productive ways of using our finite resources powered with new ideas.

In short, more growth requires more technological progress which in turn requires us to discover more ideas for using our finite resources. It requires rethinking intellectual property and overhauling who owns and controls ideas in society. It means investing more in R&D and getting more people into the economy who are responsible for generating ideas, and using technology to develop ideas.

R&D expenditure as a percentage of GDP is high in Israel, but OECD countries invest much less in research. In contrast, companies like Alphabet and Facebook spend far more on R&D – to the extent that their spend makes even the spend of the most ambitious countries like Israel look meagre.

The use of technology to develop ideas is visible in how Moderna used AI to develop vaccines. In perhaps the most celebrated example of technology evolving to fuel growth, AlphaFold, the AI system developed by  Google DeepMind, can predict a protein’s 3D structure from its amino acid sequence, transforming the way we understand disease in years to come.

Today’s ideas increasingly come from technology, and economic growth depends on countries willingness to invest in these technologies.

However, Susskind said that the growth dilemma can’t be solved by technology alone and we also need to change the nature of growth.

Changing the nature of growth

Growth damages the environment and reducing emissions impacts growth, creating a trade off between growth and climate. “Protecting the climate has a price in terms of economic growth.”

Technological progress in producing renewable energy means economies can continue to grow without producing emissions. He pointed to the exponential decline in the cost of solar modules as an example to illustrate how growth can become greener than before.

He also suggested we could change the nature of growth by changing incentives. During the pandemic, employers adopted and developed new technology so that staff could work remotely in a leap forward that would have normally taken decades. Similarly, the development of the vaccine was accelerated by incentives.

He said we should use every tool at our disposal to change the nature of growth to make growth less destructive, leading to healthier politics and flourishing local communities.

Susskind suggested economies revise their GDP measure. This could include finding a way to measure the things we care about and bundle it into GDP in a GDP-plus model. He suggested presenting these types of questions to citizens in mini-publics or citizen assemblies to find out what we value most. Citizen juries and panels could ask moral questions about values to find out the extent to which we value growth more than other life measures. This kind of new thought process offers an existential opportunity and a chance for moral renewal.

“These are not questions that can be asked by technocrats; they need to be answered by citizens.”

One area mini publics could help resolve conflict is net zero. A large political constituency has not signed up to net zero. Changing the nature of growth and embracing the costs that come with it, involves politics and bringing people together.

He said it is unsettling that such consequential tech sits in the hands of private sector companies. Mini publics could also be used to ascertain our appetite to use technology to fire up growth because it will involve moral questions – our capacity to use technology will run far ahead of what we are willing to do.

“Barriers to tech have less to do with technology’s capabilities and more to do with moral apprehensions.”

Susskind concluded with the metaphor of a train on fixed rails to describe our current view of growth. He said a better metaphor is to see growth as nautical on a boat at sea with an enormous discretion to go in any direction.

Using a factor model comprising real rates, inflation, growth and liquidity the State of Wisconsin Investment Board has “swapped binoculars for sunglasses” to see a new picture that effectively highlights inflation risk.

The sharp uptrend in the correlation between stocks and bonds in 2021 was a wake-up call to investors but few understood the causes or consequences or what had happened.

Most available risk models don’t capture macro-economic risk and investors struggle to see this exposure in their risk reports.

In an effort to understand what had happened, the State of Wisconsin Investment Board, SWIB, developed a factor portfolio to provide a better lens to observe the effects of macro-economic changes in its asset allocation. This revealed that inflation had a significant impact on stock bond correlations, explained Edouard Senechal, senior portfolio manager, SWIB, speaking at FIS Oxford.

Senechal is tasked with overseeing an exposure management program at SWIB, and his job is to craft an asset allocation overlay. Sometimes the team seeks to hedge exposure if there is too much risk, and other times they want to increase those exposures in a process that necessitates measuring and sizing the risk of the program.

He explained to FIS delegates that the team could see the correlation in stocks and bonds in 2021 was picking up, but they were not sure what was triggering it. Concerned about the significant impact on risk, SWIB called on its investment management partners and academics for help. It was the start of a research program with Robeco to assess what had happened and the consequences. In 2024 they published a joint paper  published in the Financial Analysts Journal.

“Back then there were very few good answers about what was going on,” said Senechal.

Together the investors looked at the correlation between stocks and bonds over a long-term horizon, casting back 100 years in US and UK markets. The long-term data showed that stable correlations also went through dramatic regime shifts.

Senechal explained that different variables impact the correlation like real rates, growth and inflation. The researchers took the variables used to price bonds and stocks like equity risk premia, real risk and inflation, real rates and bond risk premium, and saw how volatility drove the correlation, and the extent to which these factor came together.

However, the two variables that best explained the move in correlations from an economic standpoint were inflation and real rates. When inflation is low stocks and bonds don’t tend to correlate and low inflation and low rates trigger a negative correlation between stocks and bonds. He said that lower rates change the characteristics of bonds because they become a hedging asset, acting as a type of insurance policy.

However, when inflation picks up, investors don’t’ see the bond risk premia increase.

Senechal identified the issues that drove inflation higher like the post Covid recovery. He said that today deglobalization trends are also taking shape and could fuel inflation. The level of debt amongst developed market governments is high, and it’s tempting for central banks to use inflation to manage debt levels.

Inflation was a risk in 2021 and 2024 but investors didn’t measure it very well. He said the problem lay with investors looking at risk factors but not seeing the inflation factor in the models.

He suggested using four factors comprising real rates, inflation, growth and liquidity, made of assets that can be directly linked to the underlying portfolio. By using these four factors investors can in effect “swap binoculars for sunglasses” to see a new picture that effectively highlights inflation risk.