As global markets face heightened political and economic unpredictability, asset owners are rethinking traditional assumptions about risk premia, valuations and portfolio resilience, a panel told the Investment Magazine Fiduciary Investors Symposium.
Acting chief investment officer of TelstraSuper Kate Misic drew parallels between the rising policy uncertainty in the US and the long-standing concerns investors have held over China, warning that “rule-of-law” risks are being amplified by the second Trump administration.
An US offshore wind farm project in Connecticut which the $26 billion fund backed came to a halt earlier this year as the Trump administration issued a stop-work order despite the construction being 80 per cent completed. Although the order was eventually lifted, the episode raised some uncomfortable questions for the super fund.
“What’s the upshot of that? You have to think about the risk premium that you’re going to demand the next time you put another dollar in the US in that context, because that is unpredictable,” Misic told the Investment Magazine Fiduciary Investors Symposium.
“When you think about a number of conversations that all of us have had over the years as to why we don’t hold in Chinese equity the weight that they represent in the global market… a lot of those reasons are now kind of things that we’re hearing out of the US.”
MLC Super head of asset allocation Patrick Nicoll highlighted the benefits of being regionally diversified as emerging markets and developed markets performances diverge.
“At a certain point, even the exceptional assets are overvalued,” said Nicoll. “My greater worry at the moment… is probably how US exceptionalism is being priced and whether there are more attractive opportunities elsewhere with similar characteristics.”
Scenario-planning the key
Australia’s $318 billion Future Fund has used scenario analysis to inform its allocation and investment process since 2008, said director of research and insights Craig Thorburn, and a common pitfall is failing to consider upside scenarios.
“It is as much about the right tail as it is about the left tail,” he said.
“We think about the mega trend of technology and AI, the disinflationary power and the increase in productivity could actually counter the more inflationary pressures that some of your more left tail scenarios under a deglobalised world, or a world of upending demographic profiles.”
The fund introduced two new internal investment “forums”, which respectively hosts medium-term discussions with a three-year time horizon, and long-term assumptions at a 10+plus year horizon, Thorburn said.
“These types of conversations allow us to then be able to go to our board nine to 10 times a year… and we’re able to have these types of big picture yet somewhat technical conversations with them, which allows us to be nimble.”
MLC Super’s Nicoll added that funds may also want to consider adding “very specific”, derivative-type of protection for scenarios they are concerned about, even though that might not be their base case.
“If we’re placing a 10 per cent probability on a certain scenario occurring that’s quite hard to hedge against, it might be worth paying to have a very specific hedge against that – get ultra specific, so you’re not then worrying about if the correlations in my favour.
“That obviously always comes with a degree of a tough pill to swallow… but I think there’s probably greater need for that in a world where the traditional diversifier is probably not in your favour.”
Alvin Tan, HESTA general manager of portfolio construction and risk, acknowledged the heightened macro volatility overall but said the super fund needs to balance risk management and long-term growth.
With gold prices hitting record highs, Tan said the fund sees opportunities in the broader commodity market (with ‘green’ commodities a highlight) but is mindful of its long-term role in the portfolio.
“The return for commodities tend to be less than, say, equities, because commodities inform the price whereas equities give you earnings over time,” he said.
HESTA is also spending time dissecting the history of risk premium across regions and central bank behaviours and policies, which informs its assumptions around the relative values between asset classes and capital deployment decisions.
“We talk about risk premium, but often the risk premium is to cash, and the big question is what is the proper cash rates and what will central banks likely to do? So the biggest concern we have is really inflation,” he said.
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