Most asset owners are able to look beyond short-term volatility and political upheaval, and even significant falls in the value of the world’s biggest markets can be recouped over the lifetimes of their end investors, thanks to their long-term investment horizons.
But Mercer’s latest Large Asset owner Barometer reveals that the relaxed attitude they’ve been able to take in the past is giving way to increased anxiety over the outlook, with confidence in portfolio resilience decreasing as they peer further into the future.
The report, which canvasses the views of 74 large asset owners collectively managing more than US$2 trillion ($3.11 trillion) in assets, found that, while demonstrating a high degree of confidence in the overall resilience of their portfolios, more and more view themselves as vulnerable to geopolitics, inflation and monetary tightening over longer time periods.
Over a three-to-five-year view, the percentage of large asset owners that consider themselves vulnerable to geopolitical risk rises to 38 per cent from 35 per cent over the next 12 months, while regulatory risk is regarded as the second biggest issue, rising to 32 per cent from 19 per cent.
“This suggests that, after a year of major political change, asset owners are becoming more uncertain about the future direction of regulation and its impact on portfolio resilience,” the report says.
They’re also less optimistic about their ability to withstand a challenged public market outlook (29 per cent from 26 per cent) and an evolution in how private market assets are valued (26 per cent from 22 per cent).
“There are also signs that large asset owners believe the resilience of their portfolios is falling overall,” the report says.
“Across eight of the 12 risks assessed, large asset owners report their portfolios are equally as resilient as or less resilient than they were in the previous survey. The most significant increases in vulnerability come from regulatory change, monetary tightening, geopolitics and private markets valuation evolution.”They’re also dealing with new and emerging risks, like political interference, as more and more governments around the world looking to pension funds to help fund infrastructural development with public purses emptied by the fiscal initiatives of the Covid years.
Many large asset owners are also concerned about the potential for governments to attempt to influence their asset allocations,” the report says.
“Almost two-thirds (61 per cent) expect there to be attempted government intervention over the next five years, and more than a quarter (27 per cent) see these attempted interventions as a risk. These fears are more acute among the largest asset owners, with two in five (41 per cent) of those with over US$20 billion in AUM saying they view potential government intervention as a risk.”
And the danger doesn’t just emanate from outside their organisations. Many asset owners are becoming acutely aware of how non-financial risks can quickly snowball into threats to their portfolio and performance.
“After market performance, the risks posed by reputational risk and talent management are the most widely viewed as highly significant, cited by 16 per cent and 15 per cent of asset owners, respectively,” the report says.
“Smaller large asset owners are more likely to see talent management as a risk. Almost one-fifth (17 per cent) of those with less than US$20 billion in AUM see talent management as a highly significant risk to their portfolios, compared with a little over one-tenth (11 per cent) of those with more than US$20 billion.”
