David Bryant, Mercer

In 2021, super funds faced a year of great adjustment. From monetary and fiscal stimulus to the introduction of a raft of new regulation, we had to adjust, rapidly, to the changing landscape. In 2022, we have the opportunity to look forward.

By and large, we know what this year will bring from a regulatory perspective. We know, similarly to last year, that there will be continued influence of regulatory requirements on investment decisions. In financial markets, however, the outlook remains uncertain. The pandemic continues to have a profound impact on the investment landscape globally, presenting risks and opportunities that are unprecedented for investors.

For funds who have the governance framework to make timely investment decisions and seek out longer-term opportunities, there are green shoots there for the taking built around a core set of market trends and dynamics that will impact investment decisions over the next 12 months, and potentially beyond.

Here’s my take on the top five investment priorities for funds in 2022.

Inflation – not if, but when 

Central banks around the world are grappling with the dilemma of inflation, which has spiked as a result of a slowdown in globalisation alongside major economies turning to record-high levels of stimulus measures.

The impacts of inflation are wide-reaching and the looming risk of interest rate hikes will likely have a negative impact on both equity and fixed income portfolios – assets which have traditionally performed well.

While there is no single asset class solution to mitigate inflation, a diversified portfolio that includes exposure to commodity-related strategies, such as gold or sustainable natural resource equities, can provide a degree of protection for funds.

Redefining the concept of diversification

Although not a new concept, diversification remains an important strategy to mitigate the impact of turbulent markets. However, the standard balanced portfolio is not likely to produce the sort of returns that investors have seen over the past decade.

For those with lower liquidity needs, a multi-faceted and dynamic approach to diversification that considers assets outside the traditional framework, like private equity and private debt, may provide investors with broader risk-adjusted returns.

Protecting portfolios with private markets

From private equity to venture capital, natural resources, infrastructure, private debt and real estate, in 2022 we’ll see a growing need for access to private markets, as well as the specialist expertise to match.

Most types of alternative investments offer some combination of return enhancement, inflation protection, and diversification benefits, lending themselves well to the needs of today’s portfolios.

The capital inflows to these markets tell us that many sophisticated investors around the world continue to be very active across alternatives, despite the ongoing high levels of uncertainty.

Super funds would do well to consider how greater exposure to private markets can provide enhanced protection and return opportunities for their portfolios, while complementing their existing allocations.

The role of fixed income

Traditionally fixed income assets have been included in portfolios to provide defensive characteristics.  However, with the threat of rising inflation and interest rates, many investors have moved away from sovereign bonds towards credit, and from fixed rate exposures to floating rates in an effort to maintain investment returns.

But will these new exposures provide the defensive characteristics required in a future market downturn? Does the reallocation to higher yielding but lower quality investments justify the risk?

It is important that funds consider their total portfolio construction so that defensive characteristics are also built in elsewhere. This year, a well-positioned portfolio will be one that’s well diversified in a period of rising interest rates, which is no easy feat.

Reaping investor value from the transition to net-zero

More and more funds are making net-zero commitments and others continue to evaluate their stance and analyse how their portfolios are positioned for climate transition. Members are demanding it. And, with RIAA finding that super funds that implement leading responsible investment practices are outperforming their peers, portfolios are benefitting from it, too.

Decarbonisation has been front and centre. But it will take more than just measuring carbon emissions and divestment to successfully transition portfolios to a net zero and climate resilient outcome.

By developing total portfolio climate transition plans – including targets, decarbonisation portfolios and the re-direction of capital into emerging technologies – investors can play a pivotal role in actively supporting the transition to net-zero, while benefiting from sustainable, long-term returns which are becoming an increasingly common feature of ESG-geared portfolios.

There are fundamental shifts taking place in the investment landscape, bringing an abundance of opportunity as well as added complexity. Funds that have specialised expertise in investment research and the agility to seize opportunities will be able to stay ahead of the pack.

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