Japan, the recent revelation for investors.
With cash returns failing to match inflation in many countries and investors looking for alternative ways to boost returns, institutions continue to face a challenging economic climate despite equity markets rallying this year.
Against this backdrop investors are being forced to take greater risks in higher volatility and low liquidity investments to achieve target returns according to Tim Gardener, Head of Institutional Client Strategy at AXA IM, presenting at the Australian Superannuation Investment Conference on the Gold Coast today.
Despite the global headwinds, most investors believe, there are positive growth signs for the United States but they remain concerned that Europe has not moved far enough on structural change. This is hindering its recovery. Across the rest of the world, institutions are becoming more realistic on long term growth prospects for emerging markets.
“Many of the emerging markets have delivered much less recently with capital moving back to developed economies such as theUnited Statesin anticipation of a recovery. While emerging markets returns are likely to be volatile, the long term positive direction of the emerging markets story is still the prevailing view,” London based Mr Gardener said.
Another positive and surprising story for institutional investors this year has been Japan, fuelled by the growth policy commonly referred to as Abenomics, the equity market has increased by over 55% over the past 12 months.
“The revelation for investors this year has been Japan, a country which was so often ignored by institutional investors over the last 20 years. Fund managers and investors are having to rethink the strategic weighting of Japan which in many global portfolios had fallen to close to zero despite the size of the underlying economy,” he said.
But the periods of easy monetary policy which has boosted stock markets across the world will likely have follow on effects, most likely in the form of inflation and many investors are trying to position portfolios with this in mind.
“Most investors believe that quantitative easing has built inflation into the system. The problem is that since so many investors fears the same outcome, in this case inflation, the underlying assets which are considered to be long term inflation hedges are becoming expensive as demand outstrips supply,” he said.
SmartBeta, a potential solution to navigate headwinds
With potential issues needed to be navigated carefully, institutional investors are looking for ways to get more out of equities and bonds using smarter strategies including moving away from investing according to traditional market capitalisation indices and into alternative approaches. Looking at theUSequity market investing across size, value and momentum, there is a significant long term premium involved which can be exploited using a Smart Beta approach.
Commenting on Smart Beta strategies locally, AXA IM’s Director of Australia & New Zealand, Craig Hurt said: “Since AXA IM announced its global SmartBeta equity strategy in Australia six months ago, significant interest has been shown by local investors looking for cheap diversified global equity exposures which provides a more sophisticated and efficient way of capturing equity market beta than traditional approaches.”
Concluding on how institutional investors are adapting to the current market condition, Mr Gardener said: “Superannuation funds are looking at ways to ensure they meet their objectives of generating real wealth and protecting existing wealth. Strategies which worked previously are being scrutinised to determine long term viability as the industry advances from just repeating historical strategies which were once successful.”