Davos 2020 for institutional investors

The overarching theme at last week’s 50th anniversary of the World Economic Forum’s annual shindig in the Swiss alpine resort of Davos was sustainability. Against a backdrop of rising climate risk caught in the WEF’s own Global Risk Report which, for the first time, found the top five risks related to the environment, the cohort of bankers, politicians, investors and business leaders (only 24 per cent of whom were women) jostled hard to espouse their green credentials.

Amongst all the pledges, aided and abetted by the conference organisers discouraging single use plastic, offering protein alternatives to meat and rebates for its 2821 delegates (among them 116 billionaries) who chose to arrive by train and bus rather than private jet, a few stood out.

Italy’s €488 billion ($538 billion ) Generali, the world’s third biggest insurer, and the Church of England’s three National Investing Bodies (NIBS) representing over £12 billion in assets ($13.2 billion), announced they will join the Net-Zero Asset Owner Alliance. Investor members in the Alliance, which already includes US pension giant CalPERS and the insurance group Allianz, agree to push and engage (rather than divest) investee companies to be carbon neutral by 2050.

“We are proud to be part of the Net-Zero Asset Owner Alliance. It is about walking the talk and further aligning our investment portfolio to our long-term commitments. As a financial services operator we feel the responsibility of contributing to achieving carbon neutrality by 2050,” said Tim Ryan, group CIO and chief executive of asset and wealth management at Generali.

Elsewhere, repeated calls for a global carbon tax added to the growing momentum around the debate on how it might work, something the IMF explored in a paper, issued last month. Ursula von der Leyen, president of the European Commission sketched out how tariffs could be used on imports into the EU from regions that don’t penalise carbon usage. All part of an initiative that is now a central part of the commission’s European Green Deal, designed to protect European businesses under pressure to reduce their own footprint from “carbon dumping” outside the continent.

“There is no point in only reducing greenhouse gas emissions at home, if we increase the import of CO2 from abroad,” she told delegates. “It is not only a climate issue; it is also an issue of fairness towards our businesses and our workers. We will protect them from unfair competition.”

Illiquid

Away from climate concerns, pension chiefs flagged their key priorities.

Illiquid assets are one potential hazard, warned Mark Machin, chief executive of Canada Pension Plan Investment Board.

“I do ring the alarm bell on illiquid assets,” he said during a Bloomberg TV interview. “We are very comfy with our risk models and what we would do in various lurches down in markets, but I worry about the expansion of a lot funds like us around the world into private, illiquid assets.”

Machin said investors should be wary of the huge shift of assets from public to private markets because it could trigger steeper sell offs and exacerbate a crisis. Half of the $313 billion fund is in illiquid assets, he said.

“You have to be very careful to make sure that you truly understand the liquidity positions, that you truly understand if that thing turns out to not be liquid you can still cope, and if you can still pay the university, the pensioners,” he said.

He also flagged risks around trade tensions. “Our view is that these global trade tensions will continue and create some weight on global trading and supply chains and technology. There is nowhere to hide from that, so you need to diversify,” he said, suggesting cash or some physical commodities.

CPPIB, which currently holds about 85 per cent of its assets outside of Canada, plans to boost exposure to better-yielding emerging markets, lifting that allocation to one-third of its portfolio in the next five years. The pension fund still sees private equity as a good asset class from a risk return point of view and is relying on venture capital to participate early in the next market trends, he said in the interview.

Other noteworthy comments picked up by newswires came from Anshu Jain, president at Cantor Fitzgerald who warned institutional investors of the perils of negative yielding debt.

“Of greater concern for me is repercussions for insurers and pension funds that will be felt for years to come,” he said in an interview. A theme taken up by Eurozone bank executives lobbying regulators and ECB chiefs at Davos.

In an interview with CNBC Jamie Dimon, chief executive of JP Morgan, said he viewed negative rates with “trepidation” describing them as “one of the great experiments of all time,” and warning “we still don’t know the ultimate outcome.”

Elsewhere Ray Dalio, who oversees Bridgewater’s $160 billion in assets with Bob Prince and Greg Jensen, urged investors not to miss out on opportunities in today’s strong markets.

“Cash is trash,” he said in a CNBC interview. “There’s still a lot of money in cash.”

He also warned against speculative investments like bitcoin. “There’s two purposes of money, a medium of exchange and a store hold of wealth, and bitcoin is not effective in either of those cases now,” he said.