Investors are entering challenging return environment underscored by levels of geopolitical risk unprecedented in a 30-year career, says Jeff Wendling, outgoing president and chief executive of Canada’s $113 billion Healthcare of Ontario Pension Plan (HOOPP).

Investors have been supported by a benign geopolitical environment since the Berlin Wall fell in 1989 and China came into the global economy. But Wendling said this has now been replaced by wars in the Middle East, Ukraine and China’s growing show of force around Taiwan.

Indeed, as two separate geopolitical blocs emerge, Wendling questions if investors will be able to get their money out of China long-term.

“Is China even investable for an investor like us?” he questions, speaking to Top1000funds.com following the announcement of his retirement from HOOPP next year.

HOOPP’s exposure to China has fallen over time and is currently only 1 per cent. Investment strategy has always been titled much more to developed markets in Canada – where HOOPP’s $60 billion portfolio includes large real estate and fixed income portfolios – the US and Europe. The pension fund also has a 7 per cent exposure to emerging markets in Asia.

Ideally HOOPP would be invested in China, but he says the fund’s healthy long-term returns endorse a strategy that has never invested very much in the country.

“I think we can do well regardless,” he says.

Wendling’s observations of the investment climate carry particular resonance given his weight of experience – something he believes there is no subsidy for. He joined HOOPP in 1998 and has experience of the tech bubble and the subsequent wreck and was head of public equities during the GFC.

He recalls this period as the most challenging in his career. Mostly because the viability of public equities as an asset class for long term investors seemed to disappear before his eyes.

“That was a very hairy time,” he recalls. “That was a time, literally, when some folks were questioning the usefulness or the appropriateness of public equities as an asset class for pension funds.”

The experiences engrained a set of beliefs that have gone on to shape his career: investment is a cycle; nothing goes straight down (or up) for ever and the darkest points in a cycle also offer the greatest opportunities.

In the depths of the GFC when the S&P 500 was down 60 per cent, HOOPP took on considerable equity risk at unprecedented valuations in a strategy repeated during Covid when the fund snapped up Canadian banks at rock bottom valuations.

“We had Canadian banks selling off 20-30 per cent, trading at 6-7-8 per cent yields. We’re long-term investors and we often invest in those extreme market environments where the opportunities are really exceptional. It doesn’t actually mean you’re going to do well right away. You’ve got to be prepared to hold those things.”

Markets are generally efficient, and investors should be fully invested most of the time, he continues. But there are key moments, every decade or so, when markets become inefficient and characterised by extreme optimism or pessimism. This is when the opportunity for active management and long term investors really shines.

In it for the long term

Holding positions for the long-term has always been the most compelling corner of the investment world for Wendling. He was put off by the marketing component of asset management and believes it’s difficult to create long-term value from trading.

Pension fund investment was a natural fit, particularly as he was drawn to the purpose of helping create retirement security for healthcare workers and a conviction in the role of defined benefit funds in creating that security where around 75-80 per cent of pension payments come from investment returns.

Long term investors are ideally positioned to benefit from the once in a decade dislocation that markets typically experience, he continues. Only they have the ability to buy at these critical junctures because they are backstopped by patient approach that will allow the asset to recover over time without an eye on quarterly numbers.

“If I’m focused on a short-term performance, it’s got to work basically right away. That doesn’t help you make good decisions. If you’re focused on short-term performance, you’re almost trying to figure out how to call the bottom, which is really impossible to do. We’re just trying to figure out where we can make good investments and make good returns for the long term.”

He goes back to Canadian bank stocks bought during COVID to illustrate the point. The team believed it was a great price, and they would be great investments over the long term. They didn’t know when they would recover but they were prepared to hold them. As it turned out, they immediately went up when the stimulus came out.

He says long term investors don’t take a view on whether the market has reached its top or bottom. During the GFC when the S&P was sharply lower the team didn’t know if it was going to fall further or start to climb back up. But they were convinced it was a good time to buy.

Wendling says the internal and external search for his replacement is well under way.

“We’ve got some very strong folks here. But for something like the CEO, the organization is going to do a wide search, both internal and external,” he says.

The fact that he has been able to fulfil so many of his career ambitions at one organization by opportunities to rise up the ranks is a source of enduring gratitude.

 

The climate challenge represents a new opportunity for asset owners and managers to work together to find solutions and, according to Sonja Laud, chief investment officer of Legal & General Investment Management (LGIM), comes down to an optimisation: an understanding of how you get closest to responsible investment and the individual value articulation alongside financial risk and return profiles.

“We have come a long way,” she says. “Only now the idea of optimisation has come forward because we have a better understanding of what is achievable and how the market reacts. The level of sophistication now is really encouraging.”

When investors first began this journey, value statements were articulated through exclusions but, Laud says, now there is a realisation that is only handing the problem to someone else.

“Investors are looking at the impact in the real world,” she says, adding that in a few years there will be further evolution in the way those value statements are expressed.

“We are seeing high profile investors be far more nuanced across public and private, and more investors willing to say we need to deal with the dirty stuff and more actively engage with those companies. This is a massive leap forward because that’s the missing part of the jigsaw.”

The recent CFA Institute paper Net zero in the balance: A guide to transformative industry thinking, to which the LGIM CIO contributed, advocates that a new framework that includes systems thinking is necessary to branch out from the narrow measurement and management of risk predicated on modern portfolio theory.

In a nod to systems thinking Laud recognises all stakeholders need to be on the net zero journey to have impact, pointing towards engagement with companies that lack knowledge or find it difficult.

“It can be a really powerful message if you are successful engaging with them, they will have a halo effect and you can demonstrate it works,” she says. “If you can articulate a benefit statement to companies – a clear engagement goal, clear path towards it, and it will enhance your financials – there will be mutual understanding so companies and investors push in the same direction. This can be very open, constructive, clear and successful.”

In an example of partnerships in action, last May LGIM partnered with Swedish asset owner, AP7, which was looking for a way to address climate laggards via engagement.

The result was an actively managed climate laggards fund, that has also now been offered on LGIM’s defined contribution platform.

“We are also seeing other large pension funds shifting their investment approach to 3D investing. They are fully aware there might be trade-offs and are very clear and articulate about that,” she says. “They know there is a learning, it might not be perfect out of the blocks but it is forward-looking thinking about how to optimise both sides – positive externalities in the real world and financial outcomes.”

LGIM, as a $1.42 trillion manager, has made a commitment to be net zero by 2050 across all assets under management and has a 70 per cent target by 2030.

The honesty jigsaw

While recognising the industry has come a long way, there is still room for improvement. Laud points to the need for a more honest debate about what it can achieve in the real economy with net zero commitments.

In the wake of COP27, Laud says there is “rightful unhappiness” from the global south in the response by the global north in relation to the carbon intensity of their economic journey.

“Let’s acknowledge that and say we’re not on the same level, there are different standards because of the growth profile and the carbon intensity of that,” Laud told Top1000funds.com in an interview in the manager’s London office.

“In India, for example, energy poverty is a real theme. This is a global problem and we need a just global solution. Until then, we need to be realistic on what we can achieve. What we do in this industry is only one piece of the puzzle and we need a more honest debate about what we can achieve in that context.”

Not only does Laud think more realism is required, she says there is a certain “arrogance to be aware of” and an “ignorance to our understanding of the transition”.

“There is a lot we can do and not hold back to evolve, consider and have honest conversations,” she says. “We need to use the way we invest in order to foster change and allow companies to make sure they are on the right path.”

She emphasises that investing in emerging markets requires a realisation that a responsible investment proposition will look very different to developed markets.

“That understanding is lacking a bit,” she says. “You can’t approach emerging markets companies as if they are on the same path as developed [markets]. That created pushback. Sitting on your moral high horse and telling companies what to do doesn’t work. It will not solve the overall issue of a just transition if investors do more in emerging markets.”

Systems thinking: Understanding your role

A more holistic view embracing systems thinking would imply a shift in policy making as well, Laud says, again referencing the CFA Institute paper.

“We cannot assume financial services will be able to solve climate change,” she says. “There is a big role for policy makers and governments to set the framework right, a stable framework. Private capital will only come if the framework is stable and the assumptions and calculations around investments are stable.”

For governments, she says, there is a very delicate balance to achieving the right incentive systems for change.

“Let’s be very realistic, harmonising our thinking around the necessary transition will require a level of global collaboration we have never seen before,” she says. “Considering the global political context right now do we really think this is realistic? There has to be a dose of realism. We can’t afford to stop but this is another piece of the honesty jigsaw. The likeliness of meaningful progress is not very high right now.”

Laud advocates asset owners establish their own value statement and contribution in the context of that awareness.

“You will contribute in the way you can but be fully aware this might not be enough to shift the journey in the global transition,” she says. “Let’s not claim the asset management industry can save the world. It’s not our purpose statement either.”

In this context she says systems thinking is important in understanding the role of individual actors.

“We can do a lot because the capital allocation decision has a big role to play. But the fundamental purpose of the industry is to provide solutions for clients to meet their financial needs, fullstop.”

This story is part of a series unpacking the CFA Institute’s paper  Net zero in the balance: A guide to transformative industry thinking.

For more in the series visit Decisions to enable net zero investing.

Published in partnership with MFS Investment Management.

Simultaneous global challenges such as inequality, environmental degradation, financial instability and fragile supply chains are challenging contemporary capitalism’s ability to cope. MFS Investment Management president Carol Geremia says it is time to consider a new approach to build resilience and ensure long-term sustainability in markets and societies.

The neoliberal economic and political systems that have underpinned economic growth for decades are today being challenged by a series of simultaneous global challenges such as inequality, environmental degradation, financial instability and fragile supply chains.

Whether traditional capitalism is equipped to address these human, social and economic polycrises, or if a new approach is required to build resilience and ensure long-term sustainability in markets and societies, is a fair question.

“A problem becomes a crisis when it challenges our ability to cope,” says MFS Investment Management president Carol Geremia, in conversation with Top1000funds.com editor Amanda White.

Many of the issues emerging today are challenging contemporary capitalism’s ability to cope, Geremia said.

“A lot of it has to do with how capital is allocated and how we actually think about investing in all different ways across the globe and economies,” she said.

“The big, big challenge for us today is to consider what was fit-for-purpose historically is probably going to be very different going forward, and I think we really need to come together and think about how is the best way to allocate capital responsibly that actually does not only generate returns, which is what we are mandated to do, but that it actually does consider all the aspects of the systemic risks.”

While capitalism has contributed to wealth creation and wealth accumulation over decades, it has also driven greater wealth inequality. The top 1 per cent of US households account for about 30 per cent of the nation’s total wealth, while the bottom 50 per cent of households hold about 3 per cent of the nation’s wealth. In the past four years, 750 billionaires in the US have seen their wealth increase by 77 per cent.

Geremia said the genesis of MFS exactly a century ago was an attempt to democratise investing “to ensure that the markets were broadened out and accessible to all types of investors, not just the people that had all the money”.

“That history has taught us a lot of lessons that can be applied today as we think about tackling all of these monumental issues,” she said.
Geremia said it’s “really paramount” that investors think about ensuring that the capital they commit not only helps people to retire and grow their wealth, but is committed for long enough so that companies can “do good things, to actually take a stakeholder view and broaden out how they think about generating their own returns”.

“And so again, the opportunity is huge to make sure that we sort of adjust to the growth of taking so much risk that we do today, and make sure that we protect the public markets, we protect the end-investors as we put money to work,” she said.

A case in point is ESG investing, which can be challenging for asset managers because risks such as climate change are complex, forward-looking and require views over multiple time horizons.

They are unlikely to be solved by traditional ways of viewing investment and portfolio theory, and Geremia says “you can’t do it under the measurement system we have today, which is to beat benchmarks over short periods of time, and it’s almost at highest return at any cost”.

“The system is telling us right now, no, that’s not good enough,” she says.

“We’ve got to not only generate the returns over long periods of time, as investors would expect, but we’ve got to extend our time horizons as we commit capital long enough for companies to really do great things and invest and innovate.”

The concept of shareholder primacy, established by Milton Friedman, and “if the corporations are committed to maximizing returns for shareholders, then everybody wins” is in fact “cracking in a lot of different ways”, Geremia said.

“The opportunity is enormous for us to, what I call, play a bigger game and really think about new allies that we haven’t necessarily used in the past to leverage the change in the transformation and policyholders, regulators, our competitors, our voices in industry, to really say what do we need to be fit for purpose going forward?” she said.

Stewards of other people’s money really need to step up and constantly evolve as leaders if they are going to effectively navigate the complexities of capitalism and the poly crisis in these interconnected challenges that investors are facing.

“The first thing I would say is we can’t do this alone, and we know it, and that’s why I’ve been incredibly inspired by leaders in the industry that are already taking this forward in so many different ways,” Geremia says.

“The first and foremost for us, and along with others in the industry, is the objectivity, and that’s why using academics and working with academics to actually really test our theories and test our thinking, and is it fit for purpose?”

“But…how are we going to measure success? If we really want to get at sustainability and the systemic risk that we know is growing massively in the system, and yet it’s so important for us to be held accountable and to measure performance and results, how do we bring these things together and change the way we’re showing up and the way we’re measuring success and value?

“I think we could get at defining that in very concrete ways.”

A decade of disappointing absolute levels of return for emerging markets has investors re-thinking their exposures. But emerging markets are still more than 50 per cent of global GDP, and with growth driven by an entrepreneurial culture these companies are a key part of the “new global economy”. A group of investors convened in London to explore opportunities, the right risk/ return trade off and how to best gain exposure.

It may seem counter-intuitive to kick off a roundtable discussion on emerging markets talking about the United States but what happens in the US has an important impact on the rest of the world, given the size and interconnectedness of the US economy and investors’ relative diversification away from it, or overweight to it.

A functional US and China relationship is particularly important for global growth.

For investors, the Federal Reserve’s interest rate policy and stimulus pose a key challenge for allocations to emerging markets, as dovish policy has underpinned US growth for almost a decade, and helped the US stock market and, in turn, global equities outperform emerging markets.

But the outlook for emerging markets is on the up and up. On top of traditional arguments, including diversification, higher populations, and the rise of the global consumer and middle class, the wave of capital that has flowed out of emerging markets and into developed markets over the past five-to-six years, has driven developed market valuations higher and higher, and increased the attractiveness of emerging market opportunities.

“It’s clearly an interesting time for investors as we’re likely entering a period of heightened volatility around issues like trade and international relations,” said Derek Walker, managing director, head of portfolio design and construction, total fund management at Canada’s CPP Investments.

“We try and separate short-term dynamics from our thinking on the long-term in our strategic asset allocation. On the long-term side, our focus is on determining if there are structural shifts?”

“When it comes to the dominance of the US in the global financial system and its role in the global economy, we’re not seeing dramatic changes on that front, at least over the near term.”

Despite a “cautious” long term stance, particularly on China, CPP Investments aims to build a globally diversified portfolio. It is “broadly comfortable” with how it is positioned, Walker said.

From a short-term perspective, the group is closely monitoring the political environment in light of the US election results.

“One thing that is reassuring from an investment perspective is that, looking back on global trade dynamics during prior US administration, there was a lot of noise around trade but, in the end, deals got done such as the USMCA agreement and things settled down eventually,” he said.

Rasmus Nemmoe, portfolio manager, FSSA Investment Managers, said the US economy had been very strong for many years, due partly to some great companies, but also some “one-off” stimulus measures including tax cuts in 2017 and Covid-19 stimulus, plus the increase in immigration. But he argues over the next five years or so, the marginal direction of many of the drivers that have led to strong growth in the US, are not going to be as beneficial.

“I’m not suggesting that they will collapse but, at the margin, they’re not going to be as beneficial,” he said.

“For example, it is unlikely that the US can continue with the current level of fiscal excess because there is an inflation issue. The bond market will start to react more meaningfully. Trump also got elected with an anti-inflationary mandate so a lot of the drivers that have propelled US growth don’t look as strong on a forward-looking basis.”

“Starting point equity valuations today are also significantly different to what they were six to seven years ago. The US is not a cheap place. It shouldn’t be a very cheap place, but it feels excessive right now.”

“We are probably entering a period where US growth will start to disappoint and that means the [US] dollar will potentially not be as supported, which typically favours a more positive and benign outlook for the rest of the world.”

But even with Trump in the White House, Michela Bariletti, chief credit officer, Phoenix Group, said the US was still “very compelling”.

“Trump likes his equity market and he doesn’t like to lose. The equity market is our big hope that his policies do not derail the economy,” she said.

“Trump wants to implement pretty dramatic policies and he has the power to do it so we are really questioning if the [US] institutions will survive the next four years? It’s easy to start picturing a gloomy scenario in terms of whether the rule of law and the institutions will be able to continue functioning.”

“Something that gives us hope is that Trump loves the stock market. It is very difficult to see an alternative to the US because of its size and place in passive strategies and multi-asset strategies. It’s very difficult to get out of that market. What’s the alternative?”

Salami slicing

The £47 billion National Employment Savings Trust (NEST) believes there is still a strong case for emerging markets, despite a challenging decade.

“It has been an interesting journey these past few years, particularly with China and Russia, but we still believe in emerging markets,” said Liz Fernando, chief investment officer, NEST.

“About six months ago, we were indifferent to developed markets and emerging markets in terms of our relative preferences but, from a tactical perspective, we’ve been salami slicing our DM exposure because we think an awful lot of good news has been discounted. We took a view not to do that to EM, so our relative preference is now at the margin towards EM,” she said.

Taking a longer-term perspective, NEST is rethinking the optimal way to gain exposure to emerging markets.

The fund treats emerging markets (and developed markets) as a “lump” and does not take a country-specific approach. It currently invests in emerging markets through a systematic strategy that tracks the MSCI Emerging Markets Index and has a sustainable tilt.

Fernando said the Russia-Ukraine war prompted the fund to do some soul-searching.

“We’re really questioning, just because a country is in the Index, does it automatically deserve our members’ money? Can we protect our members’ interests by avoiding markets that are going to be challenged? Also, for countries that are highly exposed to climate risk, there is a high risk of emigration which may adversely impact their ability to raise taxes and service debt,” she said.

“Over a very long-term time horizon, we’re thinking about how we can be smarter than simply including a country because it’s in the index. We’ve not come to any conclusions yet.”

Relative to global indices, University of Cambridge Investment Management, which manages the university’s endowment, has been overweight UK and emerging market equities for several years, although Sarah Wood, associate director, marketable assets, said the fund is focused on absolute returns not relative performance.

“Our mission is to consistently deliver positive returns so we try not to pay too much attention to index weights,” she said.

“I’m very confident about tilting our portfolio towards markets that reward investors for being patient.”

“On both an absolute and relative basis, the US is so much more expensive. On a valuation basis alone, we’re finding cheap opportunities in emerging markets and, because we are a relatively small fund, we’re able to allocate capital using boutique managers. We’re not limited to places with a lot of depth in the market, which is perhaps one of our differentiators.”

University of Cambridge Investment Management has around five emerging market managers, including a regional Asia specialist and country-specific specialists.

“We like this approach because every country is so different. We partner with managers that speak the language, understand the social norms and have a local presence, which gives them the information and relationship advantage,” Wood said.

According to James Fernandes, deputy portfolio manager, investment strategy at Local Pensions Partnership Investments (LPPI), positions are not managed relative to the benchmark and the LPPI Global Equities Fund’s current underweight to emerging markets is a reflection of the relative attractiveness that LPPI’s external global equity managers see.

“The overall portfolio’s quality-style bias [is the result of] where our managers have tended to find a richer opportunity set in the US and Europe,” he said.

“Over the past few years, we have generally found a similar pattern amongst our peers that share similar style biases, where we have not seen any major incremental exposure to emerging market allocations, which have typically hovered around 5-7 per cent.”

Romy Shioda, managing director, Investment Portfolio Management at CPP Investments spoke of the recent challenges investing in emerging markets.

 “Our approach to stock picking is very much based on fundamentals,” she said.

“Within emerging markets, macro and geopolitical risk have broken the tie between fundamentals and stock return, and that’s the part that makes it difficult for us to continue having conviction in our ability to make money.”

 “There have been periods of great performance, but then we see government intervention and regulatory action that suddenly puts the brakes on.

While there were companies with a lot of potential, from a quality or growth perspective, Shioda said “exogenous drivers in certain markets may impede that growth.”

“That being said, we also have managers that have done well in recent years by taking these unique market conditions into account,” she said.

According to Mike Liu, head of markets and research, Coal Pension, it is important to distinguish between emerging economies and emerging equity markets.

When it came to emerging equity opportunities, Taiwan and Korea represented a significant proportion of the opportunity set but were highly developed economies with ageing populations.

Although China was ageing too, Liu said new sectors were emerging and disrupting industries.

South-east Asia, on the other hand, enjoyed a young demographic and expanding middle class, but the public equity opportunity set was comparatively smaller.

“If we’re talking about emerging markets, it’s less about GDP growth, which historically has had a low correlation to stock returns, and more about valuations, quality and innovation in certain sectors and countries,” he said.

“With China, I’m less worried about valuations, quality or innovation but, overall, I will pay a bit more attention to the geopolitical environment such as the risk of decoupling. Some investors have been concerned about investability, though it has become less an issue more recently.”

China, India and Mexico

The outlook for emerging markets is “probably the most positive” it has been for several years, according to FSSA’s Nemmoe, citing extremely attractive opportunities in countries including China, India and Mexico.

“It’s such a diverse market. It includes some of the most sophisticated companies in the world as well as frontier companies.”

“There are always opportunities in emerging markets, particularly right now, in China and India and, on a more tactical basis, Mexico.”

Despite the noise surrounding Trump’s re-election and the potential impact on trade, Nemmoe said Mexico represented excellent value.

“Mexican assets are very cheap, both relative to historical valuations and other markets,” he said.

There are always opportunities in emerging markets, particularly right now, in China and India and, on a more tactical basis, Mexico.

“Historically, whenever there has been [trade] tension, it has been a good buying opportunity. Mexico is positioned to benefit from long-term growth drivers, including proximity to the US, reshoring and investment flowing into the country that will formalise.”

However, if Nemmoe could only invest in one country for the next 15-20 years, he would choose India.

While FSSA Investment Managers has reduced its exposure to India over the past 12-18 months, it remains “very positive” about the country, albeit “cautious”.

“India has re-rerated to ridiculous levels in many ways but it still has the most desirable long-term drivers, although capital markets have a way of pricing that in pretty effectively,” Nemmoe said.

“Things are pretty red hot right now and you probably want to stay on the sidelines. I think China is quite interesting and Mexico too, and I’d probably be a bit more cautious on India.”

Walker agreed that India looked “very expensive”.

“There’s a bunch of things on the positive side but also areas that require further development in that market,” he said.

Russia (and then China again)

Although it made investors cautious at the time, Nemmoe believes that the freezing of Russian assets that occurred is unlikely to happen to China.

“Russia is still an extracting economy and commodities are fungible,” he said. “If you applied the same sanctions on China, it’s not just China that would be impacted. The entire global economy would collapse.”

When it comes to China, NEST’s CIO is “less concerned” about sanctions and simmering tensions between China and Taiwan, and “more concerned” about the renminbi (RMB) and increasing prevalence of variable interest entities.

“A key risk is currency convertibility and controls,” Fernando said, citing the painful experience with the Malaysian ringgit in the late 1990s.

With variable interest entities, investors don’t actually own equity in a company, “they may own equity in an entity that may have the legal right to the equity exposure in the company, but it also might not,” she warned.

“The risk comes through these more left field areas where the government is trying to stamp its authority and exert control to stop people getting too big for their boots.”

The Taiwan situation was worth monitoring for Coal Pension’s Liu, given it was “one of the most sensitive issues for the US-China relationship”.

 “The question then becomes, what could trigger an escalation or de-escalation [of tensions]? This has been a so-called headline risk for over 70 years so what makes it different now?”

“In the context of the US-China rivalry, I would pay more attention to what happens in Washington DC given some hawkish members in the upcoming US administration,” Liu said.

Phoenix Group’s Bariletti said that markets tended to be “quite naïve” about geopolitical risk, adding that Russia’s invasion of the Ukraine was largely unexpected, despite decades of boiling tensions.

“I’m not suggesting it’s the same situation with China and Taiwan but I’m cautious in reading the market behaviour in terms of real geopolitical risk,” she said.

“The market tends to keep geopolitical risk on the side until it flares up. The reaction to these events have been quite benign until you get to the channel of contagion being, for example, oil prices when it comes to the Middle East.”

Liu said the market was closely monitoring situations and risks around the world but it was “almost impossible” to price the time, magnitude and duration of these potential events.

Walker said there needed to be greater collaboration between geopolitical experts and investment experts to understand how best to navigate these risks.

“The market folks like us are trying to figure things out, but geopolitical experts and investment professionals speak different languages,” he said.

Asia (including China)

As the largest trading partner for many countries, China is probably the most important player in the global value chain. In Japan, South Korea and throughout the ASEAN, China is the leading trading partner.

It’s role and importance in the region can’t be overstated, which has implications for the US, said Nemmoe.

“If you put these [Asian] countries in a position where they had to choose between China and the US, it’s not a certainty that they would still choose the US,” he said.

“The US has hard power, but does it still have the same amount of soft power it had 40-50 years ago? As we shift from a bipolar world to a multi-polar world, the US will have to navigate these changes.”

According to Nemmoe, who is based in Singapore, the future is in Asia.

“Maybe I’m biased but the vibrancy, dynamism and innovation in China and throughout South-east Asia, you don’t see in other parts of the world,” he said.

“In Asia, there are new companies and new business models popping up all the time. There are first-time users of mobile phones and the internet there, and the level of entrepreneurialism is unrivalled.”

Sustainability

Roundtable participants talked about the importance of sustainability and action on climate change but stressed that expectations differed for companies in developed markets versus emerging markets.

“We have a slightly different carbon trajectory for emerging markets because they are on a slightly different journey and it’s not appropriate to hold them to the same standards,” said NEST’s Fernando.

“We can’t divest our way to net zero so [company] engagement is critical, although it is harder to do in emerging markets, which is something we worry about.”

While NEST is a well-known institutional investor in Europe, it doesn’t have the same clout in emerging markets. Furthermore, the size of the fund’s investment in companies is much smaller, making effective engagement difficult.

“In developed markets, we talk to companies about how they do business. We might also join a coalition of like-minded investors to drive positive outcomes, but we struggle to have the same impact in emerging markets,” Fernando said.

“From a stewardship perspective, it is something we think about and we don’t have the answer.”

We can’t divest our way to net zero so [company] engagement is critical, although it is harder to do in emerging markets, which is something we worry about.

One option that NEST has considered is holding fewer companies to potentially have greater influence.

When it comes to sustainability, one area of focus for CPP Investments is improving data quality so the fund can properly measure impact and enhance decision-making processes, particularly in relation to transition risk.

“Transition-related data disclosures aren’t always great and can be subject to significant revisions so we’re working with companies to improve their reporting,” Walker said.

FSSA Investment Managers has an extensive emerging market database, dating back to 1996, which it leverages not only in the investment process but also company engagement.

Environmental, social and governance (ESG) factors are fully integrated into the group’s investment process.

“We’ve always had the view that engagement is not something that we can outsource so we developed an elaborate questionnaire and built a data bank for every company we invest in,” Nemmoe said.

“We have benchmarked best practice, which helps us identify areas to engage with businesses on. We are constantly striving to better understand how ESG and sustainability issues impact long-term investment performance.”

As an active, bottom-up stock picker, with a relatively concentrated portfolio, FSSA has developed strong relationships with business owners and management teams, which Nemmoe said is a “real advantage”.

He concluded by emphasising the importance of engagement in emerging markets, especially for investors committed to embedding sustainable principles in their portfolio.

“A big benefit of having a large team and people on the ground is that we’ll meet with management teams five times a year. That access is hard to engineer,” he said.

“Active managers have a huge role to play in driving change. We can sit down with companies and challenge them about their practices, which is pretty powerful.”

Pension funds face growing pressure from stakeholders and trustees to focus on short-term issues. One common question queries why they haven’t invested more in US mega cap equities, for example. Meanwhile, CIOs and investment teams have little time spare to step back and take in broader themes and hear from different voices, threatening investment with group think.

Speaking during the closing session of the Fiduciary Investors Symposium at the University of Oxford, Richard Tomlinson, chief investment officer of LPPI, Mirko Cardinale, head of investment strategy at USSIM, and Mark Walker, chief investment officer of Coal Pensions shared some of their reflections on the current investment climate.

Tomlinson noted the importance of clarity of purpose for investors. Yet he said that purpose has become more complex. It used to be simple (financial returns) but today investors in the UK have to balance other priorities like investing in UK infrastructure, making the mission statement more hazy.

Investors are unsure of the extent to which they are investing for impact or financial return, or if they will come under pressure to divest. It makes working to clearly defined values and beliefs essential.

In the past, pension funds used to just focus on outperformance and alpha. A reference portfolio provided a simple framework for outperformance. Now many other factors have come into play that complicate decision making make it harder to judge performance.

Tomlinson welcomed greater transparency as helpful, but also noted that transparency creates challenges if investors lack clear goals. CIOs need “crystal clarity” on which decisions they are responsible for making and work to clear mandates, he said.

Despite today’s challenges, panellists reflected that investment is rarely straightforward. The days of stable, predictable equity premiums have long gone and pension funds are used to navigating a range of outcomes, anticipating change and understanding the different themes that drive macro outcomes.

Governance and remembering history

USSIM’s Mirko Cardinale noted that investors multiple priorities makes management and governance important.

“Having a good delegation framework is very important. Make sure non execs focus on the big picture,” he said.

Tomlinson stressed the importance of CIOs recalling history. Only this way will they open up their imagination to alternative risk scenarios. Younger people have no experience of higher interest rates, for example.

“It’s about looking more broadly and looking through the industry to have a broader risk conversation about what is plausible and possible. Big political and economic cycles, challenge your assumptions.”

LPPI conducts war gaming workshops to open up its thinking on geopolitics. The team mull questions around the outcome of attacks on assets like wind farms, or how the investor would navigate a dramatic fall in markets if China invaded Taiwan. The discussions provide a valuable window into risk appetite and bring past experience to bear.

At Coal Pensions, CIO Mark Walker’s key priority is ensuring liquidity on hand to pay pensions at the mature fund which has a very high pay-out ratio. “Where I get the money to pay the benefits is my first big worry,” he said, adding he faces growing short term pressure from stakeholders to find cashflows to pay pensions.

His biggest risk is a fall in economic growth, recession, or geopolitical instability impacting returns. “Taking stakeholders with you is important if you are a risk-taking organisation. You have to be really clear what the risk is,” he said.

Key risks

At USS, climate risk is viewed as a systemic risk and integrated into the investment process. The pension fund is a universal owner, and investment is framed against a thematic framework that includes the energy transition, alongside other factors.

Key issues front of mind include if the private sector has the capacity to provide solutions to the climate emergency. Elsewhere, Cardinale explained that USS plans for a series of different environments and scenarios. He said that inflation risk is likely across different scenarios and the investor is structuring in the impact of of supply shocks and structural pressure of inflation.

Panellists reflected on the importance of positioning for technical disruption, including tapping opportunities in the sectors most likely to benefit from AI. Walker reflected that Coal Pensions, dependent on external advisors, lost out from underweighting Nividia.

However the pension fund has netted other big wins. It was an early private equity investor in Space X, committing £20 million 10 years ago. “The rewards are good for tech investment; the early stage can be huge.”

LPPI’s Tomlinson reflected on the risk of investments suddenly becoming obsolete in a fast-changing world full of disruptive tech. In the coming years, will a new technology replace wind turbines? An asset might have a 30-year life but then suddenly become uneconomic to operate because something else comes out to leap frogs incumbent technology.

Cardinale agreed that AI and robotics will increase productivity and voiced his expectation that new technology will lead to new scientific discoveries.

Panellists reflected that it remains unclear if the benefits of AI will be accrued by different sectors in a disruptive process that leads to far more dispersion than the current investment landscape, dominated by big tech with the bulk of gains going to just a handful of winners.

APAC is positioned to benefit from some of the most exciting global trends that offer unparalleled investment opportunities, including urbanisation, mega cities, digitisation and the energy transition. Previous features in this series have focused on the region’s diversification benefits, short-term opportunities, and why active strategies work best. Buckle up for the long-term view.

Of all the trends set to impact APAC in the coming years, connectivity offers one of the most compelling opportunities in terms of monetary revenue and the speed at which the sector will develop. It is also immune from geopolitical risk.

Christy Tan

“Even if economies face growing competition and deglobalization, connectivity has its own momentum,” explains Christy Tan, managing director, investment strategist at Franklin Templeton.

5G penetration is forecast to hit 24 per cent by 2025 (up from 3 per cent in 2020) and 6G promises even faster connections in a dramatic boost to GDP that she says will be led by China. Connectivity is also spurring mobile penetration as people use smart phones to pay and socialise, creating an ecosystem of jobs, tax and revenue streams. Digitization also provides opportunities in technology like blockchain, AI, cloud computing and further up the supply chain, satellite connection.

Amber Rabinov, head of thematic research at $300 billion AustralianSuper, the country’s largest superannuation fund, believes that digital transformation is one of the most significant developments since the GFC. The team views trends through a global rather than regional lens, and she points to the changing composition of the top 10 stocks in the world by market capitalisation off the back of staggering earnings growth to illustrate the point.

“In 2024, nine out of the top 10 stocks in the world have a technology bent – chips, products or services like cloud computing,” she says. “Only one top 10 stock in 2004 remains a top 10 stock in 2024 – Microsoft.”

She also believes that AI’s impact on efficiency and productivity could arrive sooner than expected. “Previous adoption cycles show that it takes at least one decade and often two for a new technology to filter through the economy. There is good reason to think the AI transformation will be relatively rapid.”

The Government of Singapore Investment Corporation, GIC, guardian of Singapore’s estimated $770 billion foreign reserves, views investment in technology according to three themes: opportunities in disruption, protecting existing investments facing disruption and leveraging tech for its own investment and organisational processes.

One team assess industry trends and size the technology portfolio and composition. Another handle early-stage investments through venture capital funds, co-investments and directs supported by a strategy shaped around staying invested for the long term, including post-IPO. It enables tech companies to tap GIC for capital at different stages of their growth and connects the investor to the whole life-cycle of the company.

The green transition

Investors are also positioning to benefit from APAC’s energy transition from transport electrification to wind and solar, EV battery production and the development of low carbon tech. At Franklin Templeton, hydro is fast-becoming one of the most compelling investments bridging the transition, urbanization and infrastructure. Tan says the region needs half a trillion dollars in infrastructure investment between now and 2030.

“All investors in urbanization infrastructure must consider how water comes into play,” she says. “Hydro offers some of the most compelling opportunities.”

AustralianSuper, alongside Ontario Teachers’ Pension Plan, has invested in India’s National Infrastructure Investment Fund, NIIF. The investors put $1 billion each into India’s power, roads, airports, digital infrastructure, and logistics in 2019.

“We are a long-term investor so we can be patient. We don’t have to rush for opportunities and have strong cash flows,” says Rabinov.

GIC’s long-term capital makes it well positioned to ride out the short-term opportunity costs in green tech that some investors aren’t ready to bear. Like in 2023 when exits in climate tech declined and investment in the sector fell 30 per cent on the previous year despite the clear, long-term opportunity in the energy transition.

“Patient capital like ours is well positioned to navigate climate tech’s potential J-curve,” said chief executive Lim Chow Kiat in GIC’s annual report.

Shifting demographics

APAC’s shifting demographics also promise risk and opportunity ahead.

“The percentage of the population above age 65 across APAC is expected to rise significantly between now and 2040, and that 18 per cent of women will be in this age group, a rise from 11 per cent.” says Tan who points to statistics that show  China, Japan and South Korea  could have around 64 million less people by 2040.

But in keeping with APAC’s celebrated diverse economies, population decline in China, Japan and South Korea will be offset by large young populations in India, Indonesia and Pakistan. Moreover, the shift in demographics presents new opportunities.

“Older people have a different set of needs around healthcare, e-commerce and leisure. Expect a shift to a more consumption-led model,” predicts Tan.

Amber Rabinov

Still, investors are preparing for more challenging long-term trends too. At AustralianSuper the focus is on trends around deleveraging China and deglobalization and the expectation that trade volumes as a share of global GDP will continue to fall.

“Tariffs, subsidies and industry policies are front and centre in the current political and economic debate,” says Rabinov. “This process of trade fragmentation is occurring across geopolitical blocs, and we expect it is more than likely to continue.”

In APAC the renaissance of industrial policy has recently manifest in Australia under the Future Made in Australia framework. Rabinov expects government support will focus in areas like microchips, critical minerals, energy security and increasingly, defence. Despite the accompanying investment opportunity, she flags the growing role of governments in industrial policy is also spiking risk in the shape of larger fiscal deficits and debt levels. “This is not new, but it has accelerated,” she says.

Getting it right

Successfully investing in long-term trends requires awareness of where revenue streams are coming from and ensuring investments are scalable. Commentators also advise on a solutions-based approach as opposed to picking unproven opportunities.

“Pick investments that provide solutions to a problem like better healthcare facilities or more carbon reduction,” suggests Tan.

GIC also approaches investment through a problem-solving lens where a clear understanding of the business model in tech and spending time with production engineers is a prerequisite to investment.

“After seeing what problems they can or cannot solve in one domain, we can gauge the success of other domains,” states the investor.

Investors face fierce competition for assets in future-focused sectors like data centres and energy. But Tan celebrates the competition as indicative of the opportunity.

“Competition is a good thing – it ensures efficiency,” she says.

Long-term trends can also surprisingly quickly pivot. Regulation can change and technology investment is always accompanied by the risk of disruption down the line.

“Incumbents are constantly challenged by disruptors,” states GIC.

In a final note of advice, investors espouse the importance of boots on the ground. GIC has a local presence in innovation hubs in Beijing and Mumbai and AustralianSuper opened a Beijing office in 2012 for research purposes. Rabinov adds that internal investment is also a crucial pillar to successfully capturing future trends.

“Wherever possible, investments should be managed by those with local insights and proximity to the deals and target assets,” she concludes.

Published in partnership with Franklin Templeton Investments

APAC strategies: Why active management pays

In a region as diverse as Asia investors can lean in and take advantage of inefficiencies and inconsistencies around growth, central bank policy and diverse regulatory regimes; and asset owners in the region are increasingly finding active management, across all asset classes, optimises returns and reduces risk. Top1000funds.com investigates.

Opportunities in APAC: Diverse and dynamic

The list of reasons to invest in APAC is compelling and institutional investors in the region are increasingly tapping the opportunities. Top1000funds.com looks at the different levels of income, volatility, efficiency and ultimately returns across the region.