How do sovereign institutions enhance their yield and maximize the benefits of their long-term investment horizon?
Jeffrey JAENSUBHAKIJ – Group CIO at GIC
Mark Nicholas CUTIS – CIO Special Situations at Abu Dhabi Investment Council
Jean-Marie MASSE – CIO at International Finance Corporation (IFC)
Jean-Jacques BARBERIS – Co-Head Institutional Clients Coverage at Amundi
Moderated by Anthony HILTON – Economics and Business journalist
Sovereign institutions have become increasingly sophisticated in their investment approach to maximize their yield and to meet their long-term investment objectives. They need to integrate new risk factors and long-term investment trends, such as factor investing, the continuum between liquid and illiquid instruments, and ESG considerations. In this round table Amundi’s clients shared their experiences on how they tackle the new challenges.
POPULISM, POLITICAL UNCERTAINTY, AND INTEREST RATES
Jeffrey Jaensubhakij opened the discussion by referring to the stagnation of incomes of the middle class in developed countries, as explained by Angus Deaton, and how this has generated populist leaders and facile solutions. This pressure will likely continue, so sovereign funds must take it into account. In addition, the stable investment environment of the last 35 years, based on falling interest rates and liberal economics, could shift.
In the last decades, investing was relatively easy if you followed simple rules, he asserted. Bonds gave good returns and helped diversification, and equities benefited from globalization and strong growth. The question is, can this continue, and should asset allocation continue to focus on developed markets? Or will the fear of populism lead governments to spend more, raising deficits and stoking inflation?
Mark Nicholas Cutis agreed that the rise of populism in developed countries could lead to higher spending and ultimately push up interest rates. The question is not whether, but when. Discounting the idea of secular stagnation, he said that interest rate cycles normally last about 35 years and governments will continue to borrow, so there will be an inevitable rise in rates.
Quoting economist Hyman Minsky that “stability breeds instability”, Mr. Cutis cautioned that one needs to balance the impulse not to be underinvested in a growing economy with the uncertainties of a changing environment. He was dismissive on the conventional wisdom on inflation, “to think that inflation is dead, you should recall what happened the last time. People were saying inflation is never going to die. It’s always the same in our business!”
« From a portfolio manager standpoint, you cannot deal with the broad sweeps of history, but what you can do is look out and say, ‘on this horizon, what do I expect to earn?’ »
AMUNDI LOOKING TO EUROPE
Asked how Amundi can help investors navigate the more uncertain environment, Jean-Jacques Barberis called for putting Amundi’s “European touch” to work. In the beginning of the year Amundi advised clients that the political risk in the US and UK was underestimated by the market, while it was overestimated in Europe. In fact, he sees a window of opportunity in European asset classes, particularly equity.
ILLIQUID ASSETS-A SOLUTION?
Turning to the advantage of sovereign funds being free to invest in long term illiquid assets, Mr. Jaensubhakij cited the need to look for niche markets where liquidity premiums are still available. He praised Amundi’s strategy in this regard. However, this is becoming more difficult, and returns are low–for example, real estate is only about 1.5 percent above bonds. It is therefore hard for his fund to hit its target of 9-13 percent of its portfolio in real estate and private equity.
Mr. Cutis cautioned that valuations for illiquid assets are stretched, and that if fund managers are not already in the space they should keep their portfolios small and try to learn about it first. Even his fund, with substantial experience and global investments, is being very selective. Concerning geographic focus, he said that it is a bottom-up process, with the underlying projects driving the geographic allocation.
« You are being paid very little for a whole range of illiquidity risks. You really have to look for niche areas, where the vast bulk of money hasn’t gone in and liquidity premiums are still available. »
SOLVING THE WORLD’S PROBLEMS THROUGH INVESTMENT
Jean-Marie Masse explained how Green Bonds can efficiently channel funds to emerging markets to mitigate climate change. Supporting the Green Bond initiative, Mr. Barberis said it has created a new asset for institutional investors that will deliver market returns with a risk profile enhanced by the IFC.
Mr. Jaensubhakij countered that, while many green investments are yielding solid returns, for fiduciaries the perception remains that they are not as competitive as other investments. An initiative such as Green Bonds, backed by IFC and Amundi, will help improve their reputation. Mr. Barberis specified that the ESG space is large and that Amundi is seeing increased interest in such investments. However, the objectives of investors are different, so Amundi builds tailor- made solutions. For instance, for green finance via equity, it has created low-carbon indexes.
On the infrastructure side, it has a joint venture with EDF, most recently using the partnership to innovate with bonds. “It is a very concrete example of what partnership can mean, between a private asset manager, a public entity, and some private investors whom we hope will join in the near future,” underlined Mr. Barberis.
« Investing green is not a charity business, it is not about morals, it is not about ethics– it is about making a good investment. »